There seems to be grounds for arguing there is no such restriction, following some of the inhabited house duty cases, but s224(2) states:"If at any time in the period of ownership there is a change in what is occupied as the individual’s residence, whether on account of a reconstruction or conversion of a building or for any other reason, or there have been changes as regards the use of part of the dwelling-house for the purpose of a trade or business, or of a profession or vocation, or for any other purpose, the relief given by sections 223 and 223B may be adjusted in a manner which is just and reasonable."
If a dwelling has been significantly enlarged during the period of ownership, there appears room for HMRC to argue that the extra bits were not occupied before the change and therefore the PRR calculated under s223 should be restricted on a just and reasonable basis.
I would be grateful for readers' views.
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My initial reaction is that you are over thinking this.
Isn't it the case that there hasn't been any change in the use of the dwelling house? It's just got bigger?
Perhaps I am overthinking because I can find very little on it.
S224(2) refers to "a change in what is occupied as the individual’s residence" and "for any reason" seems to broaden its application.
If an individual 'downsizes' and converts the house into 2 flats, having occupied the whole house, and then lives in the ground floor flat and rents out the top floor flat, wouldn't S224(2) restrict the PPR under s223? It seems to me that an enlargement is in reverse.
What if I've lived in a modest dwelling located on a very large plot for the first 9 years of ownership and then build a big mansion and then sell within 1 year of residing in the larger house? Perhaps I wouldn't have the same house and would be in the same position as Paul Gibson [2013] TC03021 . If so, the extent of the alterations may become relevant.
I've also thought about whether an enlargement within the curtilage of the original sized house would help, but this principle seems to be confined to establishing whether ancillary buildings are part and parcel of the main dwelling.
In your downsize example there is a change in use of the building. An enlargement isn't the reverse of this.If an individual 'downsizes' and converts the house into 2 flats, having occupied the whole house, and then lives in the ground floor flat and rents out the top floor flat, wouldn't S224(2) restrict the PPR under s223? It seems to me that an enlargement is in reverse.
Perhaps I wouldn't have the same house and would be in the same position as Paul Gibson [2013] TC03021 .There were a number of other factors taken into account in reaching the decision in Gibson.
Please note that I haven't actually researched this. This is just a reaction and I'm very willing to be corrected by learned colleagues. It's just that people enlarging their house is a very common occurrence and I would have thought this issue would have been well documented if it applied in your example case.
Perhaps I am overthinking because I can find very little on it.
S224(2) refers to "a change in what is occupied as the individual’s residence" and "for any reason" seems to broaden its application.
If an individual 'downsizes' and converts the house into 2 flats, having occupied the whole house, and then lives in the ground floor flat and rents out the top floor flat, wouldn't S224(2) restrict the PPR under s223? It seems to me that an enlargement is in reverse.
What if I've lived in a modest dwelling located on a very large plot for the first 9 years of ownership and then build a big mansion and then sell within 1 year of residing in the larger house? Perhaps I wouldn't have the same house and would be in the same position as Paul Gibson [2013] TC03021 . If so, the extent of the alterations may become relevant.
I've also thought about whether an enlargement within the curtilage of the original sized house would help, but this principle seems to be confined to establishing whether ancillary buildings are part and parcel of the main dwelling.
Looking at Gibson - https://www.bailii.org/uk/cases/UKFTT/TC/2013/TC03021.html - they were a peculiar set of circumstances where the tribunal judge & member were at odds as to whether a 'new construction should be regarded as the same dwelling house as that which originally existed' and the judge had the casting vote for no. Moving on from that it became a question of whether the appellant had moved into the property as his main residence, or was just camping there (as his agent accepted at the hearing.
The downsize & split into two flats example seems clear.
The 'live in for 9 years, demolish & build much larger, reside for another year then sell' example is not really on a par with the Gibson facts, which was over a much shorter timescale, but would probably still require good evidence for the change & sell in a relatively short space of time along with evidence of actual occupation as a residence post new build (not just immediate marketing & camping out).
But just extending the original property seems to be pushing the point too far and should require a very specific set of facts to be other than PPR throughout
Do you?
Seems a perfectly sensible question to me - actually, one of the best (tax questions) I've seen in here for a long time.
Making house bigger to live in results, on the face of it, in a change in what is occupied as the individual's residence. So, on the face of it, s224(2) is in point. And, on the face of it, that was the question asked.
Surely it would fly in the face of reason that making a house bigger and continuing to reside in it after the extension was other than PPR throughout and would require a very strange set of facts for a tribunal to decide otherwise? I certainly hope so as we extended our house, mind that was 15 years agoMaking house bigger to live in results, on the face of it, in a change in what is occupied as the individual's residence. So, on the face of it, s224(2) is in point. And, on the face of it, that was the question asked.
My father-in-law's house is twice its original size. The previous owner added 50%, and he's added the rest - probably more than 15 years ago.
Prior to Galaxian's (excellent) question, it would not have occurred to me that anything other than full PRR would apply. (So, despite my apparent dig at Paul, I do find myself wondering why the question has arisen... I suspect, as you say, an atypical fact pattern.)
BUT (key point), don't forget that all s224(2) does is permit a just and reasonable adjustment. Just because it applies, it doesn't mean there's a loss of relief. In your case - in FIL's case - maybe in most cases - I would not expect a loss of relief. That may be of no comfort to Galaxian, though.
On the specific point of the curtilage/land attaching to the dwelling house (the extension obviously being on such land)... land is identified separately in s222(1), it is not of itself part of the dwelling house, so I agree with Galaxian that there is probably no automatic relief from those provisions.
Making a house double size with intension to sell immediately upon works completed would also be a relevant issue
Making a house double size with intension to sell immediately upon works completed would also be a relevant issue
Agreed, although s224(3) is probably a greater concern then (because it looks more prescriptive/less a matter of judgment).
Making a house double size with intension to sell immediately upon works completed would also be a relevant issue
Indeed. My comment re flying in the face of reason if extended and continue to live there was coming from extending the family home & staying there for years rather than selling quickly.
'Just & reasonable' on extend & sell would presumably mean that the majority of any gain was either exempt PPR, or largely covered by the cost of the extension?
Interesting point to consider though
You are overthinking. The answer is at s222(1)(a).
Strictly speaking, you should apportion the gain, but if the extension (being the part referred to in the above paragraph) has been occupied as PPR thought its existence that part of the gain would also be exempt.
All s222(1)(a) does is tell you the exemption is in point. It's s223 that tells you whether the gain is fully exempt. And s223 is subject to s224. So, respectfully, yours cannot be the complete answer.
I was trying to keep it short - not always wise in tax. But if the extension has been occupied 100% as PPR throughout its ownership (as has the original building) then the combined effect of 222, 223 and 224 would be to exempt the whole gain - apportioned or otherwise.
Consider the situation where 75% of the property had been occupied as PPR and an extension added, used solely as PPR. In that case you would need to make a further apportionment of the gain. But if the entire property is used as PPR throughout ownership (which was the scenario envisaged in my all-too-brief reply) there is no practical need to apportion.
No doubt Basil will be along soon to add a further 12 paragraphs.
So you consider full PRR in my mansion example (quality of occupation and s224(3) issues aside)?
Yes I do. The argument suggested in your final paragraph would make no sense. It is fairly obvious that an extension could not be occupied before it existed. As I’ve said, on a strict application of s224 the gain would need to be apportioned between the original and the extension. But if both parts have been used 100% as PPR combined effect of ss222 and 223 would be to exempt the whole gain, making any apportionment pointless.
As I’ve said, on a strict application of s224 the gain would need to be apportioned between the original and the extension.
Where does it say that?
It depends on how you interpret “change in what is occupied as the individual’s residence”
If you (as I do) take that as meaning a change to the house that the individual lives in then an extension is by definition a change in “what is occupied...”
224(2) comes in two parts (as I read it) - one dealing with changes to the building, the other dealing with changes to the nature of occupation. The OP’s scenario appears to fall within the first.
I'm not sure what you mean by 'combined effect'. There are two steps in my mind. There would be no restriction under s223 (to be contrasted if there had been no dwelling initially on the land as in Henke). The relief given under s223 is subject to s224(2) just and reasonable apportionment where there is a change in what is occupied as the individual’s residence. It is then a question of what is 'just and reasonable', which is perhaps influenced by the extent of the change? I would say is is not 'just and reasonable' to restrict PRR on a modest extension.
'Change' refers to an existing residence
You are missing my point. Even if an apportionment of the gain were carried out, a just and reasonable amount of relief in your case would be 100%. I know that s224 talks about giving the relief in a just and reasonable manner (and does not specifically refer to an apportionment of the gain) but I suspect that in most cases the appropriate amount of relief to be given would in fact involve some apportionment of the gain.
So you consider full PRR in my mansion example (quality of occupation and s224(3) issues aside)?
In that example can you set aside the quality of post occupation? That would become a factor in a claim, based on the full circumstances
If I understand that logic, you are drawing on the case law referred to in the OP.
Like Galaxian, I'm not convinced that logic applies; s224(2) makes specific reference to the change being "on account of a reconstruction" (etc), and I suspect a court or tribunal would be able to distinguish the case on those grounds.
It remains my view (and here I'm going to go all Basil-esque and say that if I add more, I will merely be paraphrasing) that s224(2) applies in theory, but its application will result in an adjustment in practice only in specific circumstances (and TBH other rules would probably have the first bite in such circumstances, so the practical relevance of s224(2) applying is probably close to zero). In short, I agree with Paul. (Both of them.)
I believe that we do agree here. S224 would apply in theory, but in practice would often have no effect. That’s the point that I had been trying to succinctly make.
Just reading the section y0u are quoting there, it appears to be talking about change of use of an existing building. This seems reasonable. To use your house into two flats example in reverse, say you owned both flats but only lived in one. Later you converted the building into a single dwelling. A restriction on the gain for the separate flat not originally being part of your dwelling makes sense.
With the enlargement, you are talking about a building 100% used as a dwelling becoming a larger building that is 100% used as a dwelling. The entirety of the building has been used as a dwelling the whole time. Hence the whole building should be eligible for PRR relief.
The only restriction I can think of is if extra land had to be purchased to make the enlargement possible. Otherwise, the curtilage is considered part of the PRR property, so that part was "occupied" (albeit as a garden, not a building) throughout the whole period of ownership.
An enlargement is still a change to the existing dwelling. Perhaps the answer is that it is not 'just and reasonable' to restrict the relief where the whole of the dwelling has always been occupied. I can see the sense in this.
However, I would not be so confident with this line of thinking in my mansion example, but you appear to be saying that relief could be restricted if the original curtilage is extended?
Nowhere does it refer to a just and reasonable restriction. The legislation refers to giving relief in a just and reasonable manner. A just and reasonable manner, where the entire property has always been used as PPR before and after the enlargement, would be to give 100% PRR.
Just reading the section y0u are quoting there, it appears to be talking about change of use of an existing building.
That's s224(1). Read the next subsection.
As you say, it refers to "reconstruction of a building" in s224(2). But I interpret this in a similar fashion to the two flats combined example above. Where a reconstruction alters how much of a building is usable as a dwelling, then the restriction would apply. To take it further, if you have a single building, but some of it could not be used as a dwelling when you first occupied it (structurally unsound for example), I could see that reconstruction allowing that part to be used would appear to fall within this subsection.
Curious as to your thoughts on my curtilage point. Since gardens are normally part of a dwelling for PRR purposes, would you consider building on that garden building on something already occupied?
Gardens are tested separately under s222. However, there can be some overlap, for example when a domestic building is constructed on it.
It can be part of the qualifying garden and grounds (if there's no business use) or part of the dwelling if also within the curtilage.
Adding to that, s224(2) refers to a change in the residence. I think (though I stand to be corrected) that this refers to the house (and ancillary buildings) and does not include the land. Compare use of the word "residence" in s222(1).
I agree.
It is possible to have two bites at the cherry using either of the s222 limbs. If a domestic building put up on the permitted area of garden & grounds, you might as well claim it under s222(1)(b) as this test ignores any history.
"Grandma, here's an egg..."
S222(1) applies to the gain on disposal of a dwelling house (and it's garden / grounds).
S223(1) provides that no part of said gain will be chargeable, if throughout the period of ownership, it has been occupied as the only / main residence.
S224(2) provides that, if there is a change in what is occupied as the individuals OMR, relief under S223 MAY be adjusted as is just and reasonable.
So, if you put in central heating where there was none, is that "a change in what is occupied"? Of course it is, but does anyone think an adjustment is appropriate? Would it be just and reasonable? Clearly not.
The same applies if you build an extension, even a large one. There is a change, S224(2) is potentially in point but it would not be just or reasonable to reduce the relief.
One of the original contentions in Gibson , was that S224(3) applied, i.e.the improvement expenditure (on building the new house) was incurred for the purpose, wholly or partly, of making a gain.
Leaving aside the decision in the case itself, S224(3) is the only way HMRC could or would, ever challenge the PPR claim. Most typically that would be where some major expenditure was incurred and the house sold shortly after (as in Gibson).
HMRC did not pursue this line at tribunal and there is nothing to say why. I would guess however, that it was potentially more difficult to argue that point given the facts of the case, and it was easier to rest on the 2 houses point.
To expand a little on this point, how do you prove that the reason why expenditure was incurred was to realise a gain? Everyone who buys a house or carries out improvements, hopes that they will benefit in due course, but how often does HMRC challenge on those grounds? Never to my knowledge. The purpose is to improve the home, not to make a profit (at least that is what any competent advisor would argue).
In Gibson, the tribunal (by majority / casting vote) decided that the new house was not the same as the old one and the gain on sale was not PPR exempt. It looks like the right decision but is obviously fact dependent.
As to "curtilage", it is only relevant to deciding what is the entity of the dwelling house. It is irrelevant to an extension which is clearly a part of the house both physically and functionally. It is usually relevant only when a separate building is being considered.
Good question, rather obvious answer but if it was Justin, a very arguable point!
The same applies if you build an extension, even a large one. There is a change, S224(2) is potentially in point but it would not be just or reasonable to reduce the relief.
Unless I'm missing your point, that's what has been said above - except that Galaxian and I think that it could be just and reasonable for there to be an adjustment in some circumstances. (And TBH I can't see why anyone is saying otherwise.)
He's summarised it quite well though. I have learnt something today. Many thanks for all who have contributed.
It is difficult to imagine the circumstances where, a "change", such as building an extension, however large, would fall foul of S224(2). I don't think this (or central heating) is the type of change at which the legislation is aimed.
If you take the "ordinary" case, the house is occupied 100% as PPR both before and after the change. S223(1) states that in such circumstances, no part of the gain will be chargeable. So S224 adjustment is wholly irrelevant. It is clearly intended to apply where the change is of a different nature, such as ceasing to occupy the whole as PPR or conversion of the whole into flats, not all of which are then occupied by the original owner as PPR.
As I said in my previous post, something as simple as building an extension etc is more likely to be capable of challenge under S224(3) if incurred shortly before a sale, as was the case in Gibson (originally).
Since this thread has come alive again, I'll round off my contributions with a couple of points on your comment here.
S223(1) states that in such circumstances, no part of the gain will be chargeable. So S224 adjustment is wholly irrelevant.
I don't think s223(1) rules out s224. I think s223(1) is subject to s224. [There's no real debate about that, as clearly s223(1) is subject to s224(1) and s224(3)... on old Aweb, I could therefore have used some fruitier language here!]
In a similar vein, I do not see subsections 1, 2 and 3 of s224 as mutually exclusive (if you meant to imply that they were). In many ways, ss2 may be the most widely applicable; according to you, it applies if you change the central heating - I struggle to see how either ss1 or 3 would get anywhere near such a situation. The fact that it (ss2) would have no effect in such a scenario is not the same as it not applying. Similarly, in the OP's hovel-to-mansion example, as in Gibson, s224(3) may well get the first bite of the cherry(*) leaving nothing for ss2 to munch; it doesn't mean that ss2 would not have bitten had ss3 not been there. Or using your large extension example, ss3 might remove the exemption if there was an intention to extend and move, realising a gain. If there was no such intention, ss3 might miss its mark. But ss2 does not have a purpose test: if the extension never came to be occupied simply because the owner moved before doing so, I think ss2 might have an effect. I referred early on to CG64760. There, HMRC simply says "In many cases the dwelling house will have been altered or extended over the period of ownership and its use may have changed frequently. TCGA92/S224(2) applies in these circumstances to adjust the relief 'in a manner which is just and reasonable'.")
But most of what you had said repeats points others made previously, and as we seem broadly to agree on the effect (normally, none) I will leave it there.
(*) I had to get some fruit in there somewhere....
I referred early on to CG64760.
So early in fact that that must have been on a different thread(*)... :-D
(I must need another holiday.)
(*) It was: https://www.accountingweb.co.uk/any-answers/cg64663-room-with-business-u... Sorry for ((sharing) my) confusion.
I certainly don't disagree with your interpretation, nor I think, with any of the points you make.
What I was trying to emphasise (and I think the CG guidance to which you refer supports this) is that simply making a change to the building (be it CH, an extension or anything else) will not be enough to warrant an adjustment under S224(2). There has to be something more. So in CG64760 it talks about alterations to the building and its use. I don't think we will find anyone to suggest that the building work alone is enough to result in an adjustment. In the example you give of an extension followed by sale, I agree that both subs 2 and 3 could apply. Subs 2 on the basis that the extension was never occupied as PPR and subs 3 on the basis that, it would be reasonable to infer, from the facts, that there was an intention to make a profit.
Subs 3 is less restrictive than you may have suggested because it refers to "wholly or partly " for the purpose (etc).
My only concern about subs 2 is that it refers to "a change in what is occupied as the individuals residence" and arguably there is no such change if the extension is built and the extended property never occupied (depending on how narrowly you interpret "occupied"). I would certainly run both lines of argument if on HMRC's side.
As to fruit. Go for it. The government reckons 5 a day just isn't enough!
As a complete aside [forgive the sudden trolling], this thread (a reasonably intelligent discussion, isn't it? Hope so anyway!) conducted courteously and without confrontation, wholly in accordance with the 'AA Guide' is still hard to follow cold. If the part of the guidance asking OPs to look up whether their question has been asked before is serious, threads like this need to be capable of cold reading much more easily.
So the format of this forum really needs some serious thought. It's said that you should be able to work out what comment a reply is made to by looking at the time stamp and thus, if you really wanted to, to work out the order of events and reconstruct the conversation (and thus, e.g., that my comment at 10:42 was a reply to Wilson's at 10:25).
a) that's way too hard and b) it's cobblers anyway, because the comments would have appeared in the same order had I been replying to that comment an hour later. [And I'm ignoring c), I cleverly replied at 10:05 to a comment Paul Utherone apparently didn't make until 13:46!]
I'm cc'ing this comment to Maddy. It needs sorting.
I suppose it doesn't help when the reply is made to the person (whoops done it again!) rather than the question.
BUT
Without replies to being an option there is going to be numerous quotes needed for comments to be understood in context
So perhaps (because I agree that would be annoying... it already is annoying when people quote whole posts just to reply to a tiny part of them) maybe there need to be two changes:
1. posts can't be edited once replied to (so my point (c) goes away) and
2. replies to should (automatically, obviously) refer to the post being replied to by the timestamp. So eg instead of this comment being shown as "replying to Paul Crowley", it'd say "replying to Paul Crowley 14th Aug 2020 18:04"
What do you think? (Maddy and the mods are watching.)
Thanks for the constructive tone of debate everyone, and for the user feedback.
We are preparing a wishlist of issues raised by the community. The sequencing and presentation of threads is already on that list so we can add the suggestion about chronological organisation with "responding to..." as an option.
Probably the best way to do this would be to create a test version and let a few users loose on it for a few days. We have just appointed a new head of product for the whole company, so I'll make sure that she's aware of the suggestion.
Remember, as any software customer should know by now, there's a big gap between wishlist suggestion and live product feature - so no promises just yet. Nevertheless, it can't hurt to try out a few ideas and see which ones actually work in a semi-live setting. We'll report back more formally if and when we hear any news on this front.
