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Does Ritchie trump Henke

CGT and PRR

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Some of you will recall I raised this query last week;in connection with a friend buying a Farm Estate with a Farmhouse and Barn (amongst other assets).

Turning only to the CGT arising after the Barn had been converted into a dwelling and it is proposed that it is now sold.I suggested that having destroyed an asset,namely the Barn and built a house;the whole of the gain should be subject to the PRR exemption.I was correctly put right ; on the basis of Henke that the PRR exemption only applied from the date the Barn house became occupied and not the whole period of ownership.A time % being applied to arrive at the chargeable gain.My friends Accountant arrived at the chargeable gain by applying the percentage against the profit arising after deducting the original Barn costs and building costs from the proposed proceeds.

One respondent mentioned that there was a case subsequent to Henke but could not recall it, suggesting it was Higgins ?I actually came across the Ritchie case.This case had a number of different strands to it.However the most pertinent to my friend and my contention was that the Judge considered it absurd that a time % only should be applied in cases like these.Ritchie bought his barn for £11k.The Judge suggested that instead the base cost to be applied should be £200k being the revised rateable value on the land on which the House was built.HMRC seemed to agree this with the Ritchies.Reducing the CGT they had charged from £60 k odd to very little.

While I appreciate the fairness of the Ritchie end result.The fact that the Judge proposed a fair and reasonable calculation of the gain(rather than just a straight apportionment of costs and proceeds)on the basis of an intangible increase in base cost extraordinary.

Have I interpreted the Ritchie commentary correctly ?

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By richard thomas
20th Nov 2021 22:40

The answer to the question as posed in the heading is "no". They are both cases at first instance, and neither sets a precedent. Although Ritchie went to the UT, it was decided there on a basis that meant the decision on PRR was not considered.

I have a special reason for knowing this, which is that I was the judge on the tribunal that decided Ritchie at FTT level. And it wasn't a barn, it was just land on which the owner took several years to build the house. Another factor which made the case unusual was that the sale was to a developer who was buying up land in N Ireland like crazy and paying silly money. (See also my decision in Hegarty about the land next door - Hegarty was Ritchie's landlord while his house was being built).

But I'm afraid I don't understand how you come to the view that HMRC agreed with our view on apportionment. They appealed the PRR aspect of our decision - see [5] of the UT decision, but that decision does not make it clear if it was only the decision on the extent of the grounds or included the PRR apportionment as well. And HMRC do not reduce the CGT - the Tribunal does that. You don't seem to understand how the tax system in relation to appeals works.

Your last paragraph does not, I'm afraid, make lot of sense to me, consisting as it does of two purported sentences that are not sentences. Even if your first full stop was meant to be a comma, what was the verb you intended to use in the second clause? If it was "is" before "extraordinary", can you explain why you find what I did extraordinary, rather than being a reasonable argument on the law. Why do you not think that the law I referred to applies in this situation.

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Replying to richard thomas:
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By Michael Davies
21st Nov 2021 00:16

When is a shed a barn ?
I am sorry ,I was rushing out the door when I wrote my submission.You have put me in my place haven’t you ?Will take my time on the next occasion I have cause to raise a question .
Tell me if I have misunderstood ;but the fundamental I am seeking to establish is that the determination of the Ritchie gain was the result of the application of a “Just and Reasonable “ basis; rather than as calculated by HMRC (before consideration of relevant exemptions) of being no more than proceeds less base cost and relevant construction costs ?

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Replying to Michael Davies:
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By richard thomas
21st Nov 2021 09:20

Sorry if I was a bit peremptory.

My point about "barns" and "sheds" was this. In your case it was a barn which was converted to a dwelling house and so was obviously a sizeable structure. In Ritchie the dwelling-house was new built, but there were some ancillary buildings on the site which were claimed as part of the curtilage of the house so as to justify an area of land in excess of 0.5 hectares as appropriate to the dwelling-house, and that was what the primary issue was about. As it happened there were two sheds on the land which led to my footnoted Monty Python reference.

You are right to characterise the apportionment question as one where HMRC said pure time apportionment over the ownership of the land but the Tribunal held that it was "just and reasonable" to take into account the huge windfall element of the gain. The Tribunal was applying s 224(2) to this situation: it is an open question of law whether it was right to do so. I would say it is not open to either side to appeal the exact manner in which we apportioned it unless it could be shown that no reasonable Tribunal could have come to that particular decision as to the way in which we applied the j & r test.

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Replying to richard thomas:
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By Michael Davies
21st Nov 2021 10:52

Thank you.No problem.

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By Tax Dragon
22nd Nov 2021 10:00

I doubt very much that Ritchie is at odds with Henke.

Why do you think that Ritchie would help your friend anyway? Seems to me that, if it was a precedent (thankfully it's not), it might make your friend's position all the worse. If the logic is that a just and reasonable adjustment to PRR might reflect the gain attributable to the periods of different use other than on the accepted basis of a time-apportionment*, most of the gain on the Barnhouse is surely attributable to the period that includes its construction (which was prior to occupation). Once it was constructed, it seems to have been occupied as the OMR for only three years. How much has it increased in value in that time, compared with how much value the conversion itself added?

* I haven't read the FTT report to see whether that was the logic precisely, but I think it's probably close enough. Aweb covered it here: https://www.accountingweb.co.uk/tax/personal-tax/cgt-problems-with-the-p... (my favourite line is "It was clear Billy used the shed as part of his dwelling house - and had done [so] even before the house was completed"). The appeal (not relevant to you) was covered here: https://www.accountingweb.co.uk/tax/hmrc-policy/upper-tribunal-ftt-decis...

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