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CGT on land/farm then knocked down into PPR

CGT on land/farm then knocked down into PPR

Help sought on CGT future disposal please. Or opinions. Client owned farm and land in the sixties (after 1965). Including cottage.

Farm was farmed (by H&W) until it's sale in 1995.  Cottage retained.Cottage was occupied by farm worker until the 1980s, then rented out as residential rent thereafter.

About 10 years ago the cottage was converted into the splendid house it now is worth over £1m. Looking at CGT and downsizing, planning etc. 

Two thoughts on CGT - 1) compare £1m to the MV82 plus the costs of building 10 years ago. PPR for last 10 years etc etc or 2) well it's a new asset? The old asset - on which it was wholly business or wholly not PPR - has disappeared? Therefore look at the deemed gain that it was in 10 years ago, before the old asset became the new house, and tax the gain that would have arisen then? No PPR and tax at 28%.

option 2 might seem a bit of a made up tax rule?? Or am I just thinking it's unfair to tax numbers for selling the PPR (new asset) when much of the time period relates to an old asset that simply disappeared?




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By Ruddles
16th Mar 2018 15:14

You need to clarify what happened - you say that the cottage was converted into a (presumably) bigger house but in the title you suggest that it was knocked down?

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to Ruddles
16th Mar 2018 15:28

Apologies. I haven't yet changed the words.
Knocked down. Defo.

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By Ruddles
to HeavyMetalMike
16th Mar 2018 15:52

You need to consider TCGA 1992 s.24 (subs.(3) in particular).

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to Ruddles
16th Mar 2018 15:54

You're a star. Three CTAs in this office (old enough to be ATII as well we are) and now a dog is telling is the answers :)
I've looked and will read.

1000 thanks.

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By possep
16th Mar 2018 16:11

Perhaps also look at TC03021: Paul Gibson

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17th Mar 2018 17:07

Broadly option 1 applies as follows:-
The land was acquired from ca.1965. It had a value in 1982[the cottage is irrelevant, as it no longer exists]. Ca. 2007 the clients spent money to create a new home on the land. There is no suggestion that this was with a view to realising gain on its disposal. TC 03021 is thus irrelevant.

So we have an asset[the land] as at 1982 on which PPR relief will apply on about 10/36 on that part of the gain, and wholly on the gain on the building costs. A bit of maths will be required!
Look at s224(2) to "help".

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17th Mar 2018 21:55

Extract from CCH 546-650

Effect on calculation where there is a change in use during ownership
If during the period of ownership there is a change in what is occupied as the individual’s residence, for example because of a conversion or reconstruction of the property, or there are changes in the use to which part of the property is put, the relief may be adjusted in a manner which is just and reasonable (TCGA 1992, s. 224(2); FA 1996, Sch. 20, para. 60). Before self-assessment, the decision regarding what was a just and reasonable adjustment of the relief rested with the commissioners.

An HMRC interpretation, (IRInt. 73 (superseded by CG64200 onwards)), issued in the pre-self-assessment era when HMRC decided on the method of apportionment, highlights a distinction between this apportionment and that contained in TCGA 1992, s. 223(2), based on the view that commencement or cessation of use of a dwelling-house as a residence is not a change of use. Such commencements and cessations are dealt with using the time apportionment fraction provided for in TCGA 1992, s. 223(2). The HMRC approach to apportionments under TCGA 1992, s. 224(2) emphasises that the facts of each individual case must be considered, but having said that, there is a general presumption that the crucial factors will be the extent to which, and the length of time over which, the part of the building has been used as a residence. This does not normally involve the use of intervening market values, the HMRC view being that the time apportionment method laid down in TCGA 1992, s. 223(2) should govern the appropriate approach to TCGA 1992, s. 224(2) apportionments. Nonetheless, in deciding on a method of apportionment under self-assessment, it should be remembered that the statute merely provides for an adjustment ‘ … in a manner which is just and reasonable’. If it is considered that wide fluctuations in the value of a property mean that time apportionment does not produce such a just result, there may be a case for using intervening values. The relevant section of the interpretation (which may still provide useful guidance for arriving at a just and reasonable apportionment under self-assessment) is as follows:


In broad terms the apportionment rules work as follows:

•Section 222(10) apportions consideration where required;

•Section 223 apportions the gain over time;

•Section 224(1) restricts relief to parts of the property not used exclusively for a business etc;

•Section 224(2) provides for a just and reasonable apportionment to apply where there is a change in use.

Section 224(1) only applies where the part of the property concerned has been exclusively so used throughout the period of ownership. It does not refer to use only at the date of disposal. Where Section 224(1) applies no relief is due on the part of the dwelling-house used for business etc, even for the last [18 months] of ownership. This is because Section 224(1) only applies Section 223 to the part of the dwelling-house not exclusively used for business etc. Section 223 specifies how much relief is due, and since it does not apply to the business part no relief can be given for that part for any period.

Section 224(2) provides for a just and reasonable apportionment to apply where there is a change in use, and for this purpose commencement or cessation of use of a dwelling-house as a residence is not a change of use. Section 223 already gives the rules required for such cases and there is therefore no need to apply Section 224(2). Our approach in cases falling within Section 224(2) is to deal which each case on its merits, and to produce an adjustment which so far as possible reflects:

•the extent to which, and

•the length of time over which,

each part of the dwelling-house has been used as part of the residence.

This approach broadly follows the statutory method of apportionment for more straightforward cases set out in Section 223 and Section 224(1). We do not normally consider it is appropriate to take into account intervening market values when apportioning gains to different periods in Section 224(2) cases since Section 223 clearly provides for time apportionment as the appropriate method.’

In Ritchie; Ritchie [2017] TC 05911, the First-tier Tribunal considered a case in which the taxpayers owned a plot of land on which a dwelling was constructed, completed seven years after the land was acquired. Some years later, a substantial gain was realised because a developer wished to acquire the plot (including the house) to gain access to an adjacent development site. Following Henke & Anor v R & C Commrs (2006) Sp C 550 (see ¶545-650), the gain had to be apportioned between the periods of occupation and non-occupation as a residence, but in this case the FTT concluded that a just and reasonable apportionment of the gain should be made under s. 224(2) (using respective market values at the date of acquisition of the land and the date of occupation of the dwelling) on the basis that there was ‘a change in what [was] occupied as the individual’s residence’ as required by that subsection. A further requirement of s. 224(2) was that the change should occur ‘on account of a reconstruction or conversion of a building or for any other reason’ - in the present case the change occurred by reason of the completion of construction of the house, which they considered should be covered by the phrase ‘or for any other reason’.

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