Exclusive use for PPR

Interaction with income tax

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A limited company uses outbuildings owned by the Director/shareholder which are now being sold for development.  The outbuildings occupy 35% of the floor area of the home and there is also an office building occupying 15% which will be retained.  Rents paid by the company have been included in the personal tax return less 50% of the costs (utility, council tax, mortgage interest etc).  I would probably have adjusted the 50% for some private use but this is an inherited position from a previous accountant who never addressed the CGT implications of the business use.

I am now looking at the availability of PPR for the sale of the outbuildings and the future treatment for the office.  These are not exclusively used by the business since there is camping equipment and cars etc stored in the outbuildings and the office has some home use too.

Since there has not been exclusive use by the business then can PPR be claimed notwithstanding the historic treatment for income tax purposes?

CG64690:

"TCGA92/S224 (1) does not exclude from relief any gain accruing from part of a residence used for the purpose of the owners office or employment. No adjustment should be made where, for example, a room is used as a study, even though a deduction has been made for employment income purposes in respect of expenditure for the use of the room."

Replies (17)

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By Tax Dragon
12th Sep 2017 10:11

One of your problems with that is that the company rented the buildings. Did you declare a BIK for the continued 'home' use by the director?

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Replying to Tax Dragon:
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By Portia Nina Levin
12th Sep 2017 10:29

I'd suggest it probably falls within the exemption conferred by s 316, which applies provided that private use is not significant.

I think it is pretty hard for HMRC to argue that business use has been exclusive.

Ultimately, if your client goes to tribunal and gives credible testimony on the way that the buildings have been used privately, and HMRC cannot undermine that evidence, then you'd be home and dry. HMRC know that too.

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Replying to Portia Nina Levin:
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By Tax Dragon
12th Sep 2017 10:48

S316 applies in respect of accommodation used by the employee in performing duties of the employment. Now, I know you don't like me drawing conclusions (and I agree), so let me ask: OP, was the use of the accommodation for storing camping equipment, cars etc a duty of the employment?

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By Portia Nina Levin
12th Sep 2017 11:24

I'd understood that it was used as an office, where I would presume that the individual sat at his desk and performed the duties of his employment, like running the company, and that the office accommodation was provided by the employer (who rented it from the owner) for that purpose.

I'd further understood that the "home use of the office was incidental private use that was not significant, and was not a duty of the employment.

I'd also understood that the storing of camping equipment, cars, etc, did not take place in the office (rented to the company), but in the outbuildings, and that, in consequence of its rental of the office, the company also had use of those same outbuildings.

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Replying to Portia Nina Levin:
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By Tax Dragon
12th Sep 2017 11:35

I'd understood that the company rented the outbuildings which, together with the office, represented 50% of the accommodation space and to which (on that basis) 50% of the costs had been attributed.

OP: which (if any) of our understandings (rather, inferences) is right?

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By Portia Nina Levin
12th Sep 2017 11:48

The OP should probably also advise whether business rates have ever been paid on the outbuildings or office, in consequence of the business use, as that would be an argument killer.

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Replying to Portia Nina Levin:
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By Tax Dragon
12th Sep 2017 12:25

Portia, apologies for 'trolling' but for my own education... am I right in thinking that outbuildings can be part of the "dwelling house" if they themselves are dwellings, but if they are not dwellings then they are to be considered as part of the grounds of the house and not part of the dwelling house itself? The first bit I know (eg Batey v Wakefield); it's the second bit I'm not so clear about.

The distinction is significant, of course, because there is an additional "occupation and enjoyment" test in respect of grounds.

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By Portia Nina Levin
12th Sep 2017 12:56

I don't think you are correct (rather than right), no.

I just don't think that there is any case law where an outbuilding has been considered as to whether any particular outbuildings are part of the dwelling house.

It has been considered whether the accommodation used by the household staff are separate dwelling houses, or essentially an extension of the main dwelling house, as you note.

However, consider a property with no inside toilet, and a good old-fashioned brick sh...out house at the bottom of the garden. I'd venture that the separate building was part of the main dwelling house, not that it's ever going to come up.

Similarly, if there were a separate building housing a swimming pool.

Likewise possibly a freestanding garage.

I'd accept that the buildings described by the OP are not such buildings, and so I'd agreed they constitute land which must be held for [his own] occupation and enjoyment at the time of disposal. I don't particularly see that being a hurdle, if the area of the grounds does not exceed half a hectare.

Nobody else will, I imagine, be occupying or enjoying them at the time of disposal.

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Replying to Portia Nina Levin:
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By Tax Dragon
12th Sep 2017 13:03

Per Varty v Lynes.

Since I had an outside loo when I was a student I concur it was very much part of the house!

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By Matrix
12th Sep 2017 12:16

Thanks all. No BIK has been declared. No business rates were paid.

The company pays rent for the office and the outbuildings which together comprise 50% of the total area of the home. 50% of the expenses have been offset in the rental computation for income tax purposes. No private use adjustment has been made to date, although private use of both is incidental.

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By Portia Nina Levin
12th Sep 2017 12:22

Define "rented"? A lease or a licence?

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Replying to Portia Nina Levin:
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By Matrix
12th Sep 2017 12:36

I have been advised there is no lease, there are just rental payments paid by the company based on a floor plan drawn up by the accountant 20 years ago.

I need to go through the paperwork from the previous accountant to see if there was any kind of rental agreement and what advice was given on CGT at the time, if any. So boxes from 20 years ago which will be fun but the Director left it all to the accountant so knows nothing.

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Replying to Matrix:
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By Tax Dragon
12th Sep 2017 12:56

In relation to the PRR point, if enjoyment is given away even by licence then (subject to confirmation on the point I raised above) I think there's no relief.

A more formal lease/rental agreement raises the question of whether compensation is due to the company (or, rather, whether tax is due on the failure to pay compensation). But that's a whole different topic.

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By Portia Nina Levin
12th Sep 2017 12:59

See my response. Enjoyment given away at any time prior to the time of disposal isn't relevant. It is land which he has...". Present tense.

The OP appears to suggest that there is a tenancy at will, which, by definition, I believe, cannot grant an exclusive right of occupation.

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Replying to Portia Nina Levin:
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By Tax Dragon
12th Sep 2017 14:50

It is counterintuitive (applying that term subjectively... ie, to what passes for my mind) that an outbuilding let to a third party for use in its business could form part of the freeholder's home. There is though no place for intuition in tax, or law. (Certainly not my intuition!)

I take the dairy example in CG64680 as supporting your comment about outbuildings being part of the house, not its grounds. Having agreed that point (and noting that the dwelling house is outwith the "occupation and enjoyment" test - which as you say is a present tense one, easily met), I wonder whether that makes relief (or, at least, full relief) more difficult to sustain. Whereas enjoyment at the time of sale is enough for full relief for the garden and grounds, relief for the house itself can be apportioned. S224, for example, applies to the house not the grounds.

I would at the least expect HMRC to make a challenge, see CG64663.

And I have to ask, what does "exclusive right of occupation" have to do with the (correct) analysis?

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By Portia Nina Levin
12th Sep 2017 15:03

Exclusivity also goes to your BIK point. If the company has exclusive use, then the only way that the individual can enjoy private use, is as employee. But then the business use for the purpose of s 224(1) is also exclusive.

If not then the individual can enjoy private use as owner.

I think it is difficult for HMRC to argue exclusive business use, just because there has been business use. See my first post of the day.

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Replying to Portia Nina Levin:
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By Tax Dragon
12th Sep 2017 16:38

I concur in all regards.

It won't stop HMRC seeking to apply the doctor example; it has been acknowledged that the private use was incidental.

EDIT: and maybe Green v IRC (1982) doesn't help (the OP's cause).

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