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Is part of the CGT main res exemption lost here?

If owner lives in home and rents out to more than one lodger, is CGT exemption lost pro rata?

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Very few clients rent out to more than one lodger. However, I didn't realise until recently that having more than one simultaneous lodger leads to a pro rata reduction in the CGT main res exemption. Does the team agree that this is the case or is it just an arbitrary policy of HMRC which it may be sensible in practice to take account of?

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By Ruddles
17th Oct 2018 15:12

Legislative authority?

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Replying to Ruddles:
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By Wanderer
17th Oct 2018 15:33

Not legislative but possibly this:-
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64311
refers to 'a' lodger being okay but 'part let' being subject to a restriction.
Also this:-
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64702

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Replying to Wanderer:
By Ruddles
17th Oct 2018 15:42

Although a published Statement of Practice, and therefore to be borne in mind, I would still argue that each case needs to be considered on its merits.

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Portia profile image
By Portia Nina Levin
17th Oct 2018 15:25

More information needed generally, I think.

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Replying to Portia Nina Levin:
By Red Leader
17th Oct 2018 15:41

Do you mean details of the living arrangements of the lodger/s and the landlord? Meals, etc?

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Replying to Red Leader:
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By Portia Nina Levin
17th Oct 2018 15:46

More the context in which it came up. Part of the house must be being used exclusively for business purposes for a restriction to apply. That may or may not be the case in any given set of circumstances.

I hadn't seen the text of the statement of practice, before Wanderer's reference to it though, and it does say that two lodgers is a business, and one is not. That does not prevent the legislative test of whether or not the business use is exclusive from applying.

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By Wanderer
17th Oct 2018 18:14

Her's what the statement of practice said, which gave the revenue's view:-

SP 14/80 RELIEF FOR OWNER OCCUPIERS
[14 November 1980]

FA 1980 introduced a new relief from capital gains tax for owner occupiers who let living accommodation in their homes. The legislation has been consolidated as TCGA 1992 s. 223(4). The purpose of this statement is to give to people who are (or are thinking of) letting the whole or part of their homes an indication whether they are likely to be liable to any capital gains tax when they dispose of them. Anyone who would like further information about the application to his own circumstances of the rules and practice described in this statement is advised to get in touch with his tax office which will be pleased to give further help.

Full exemption

Where the owner of a dwelling house has occupied the whole of it as his only or main residence throughout his period of ownership

•Since 6 April 1965 if he acquired it before then and disposed of it before 6 April 1988, or

•Since 31 March 1982 if he acquired it before then and disposed of it on or after 6 April 1988.

Any gain on disposal is entirely exempt from capital gains tax.

Lodger living with the family

Where a lodger lives as a member of the owner’s family, sharing their living accommodation and taking meals with them, no part of the accommodation is treated as having ceased to be occupied as the owner’s main residence, and the exemption will not be restricted at all.

The relief for lettings

The new relief will apply where the owner disposes after 5 April 1980 of a dwelling house which has been his only or main residence during his period of ownership but which he has wholly or partly let as residential accommodation. That part of the gain which would previously have been taxable, ignoring the relief for lettings, will now be exempt from capital gains tax up to the lower of

•£40,000 for disposals on or after 19 March 1991

and the amount of the exemption attributable to his own occupation. The amount of the gain on the let part depends on two things–

(i)how much has been let; and

(ii)the length of time during which it was let.

For example, someone occupies the whole of his home (acquired after 6 April 1982) for six years out of a 10 year period of ownership. One-third of it is let throughout the other 4 years. The gain on the house as a whole is £30,000. Ignoring the relief for lettings, £26,000 would be exempt from capital gains tax and £4,000 (1/3 × 4/10 × £30,000) would be chargeable.

Relief for lettings applies to the £4,000 (which is less than the two limits referred to above) so that the whole of the gain of £30,000 is now exempt.

When relief for lettings is available

Whether the let accommodation is part of the owner’s dwelling house or is itself a separate dwelling house depends on the facts of particular cases. The Commissioners for Her Majesty's Revenue and Customs wish to make known, however, their view of the application of the relief to the common case where the owner of a house, which was previously occupied as his (or the family) home, lets part as a flat or set of rooms without structural alteration (or with only minor adaptations). For the purposes of relief for lettings the Commissioners for Her Majesty's Revenue and Customs regard this as a letting of part of the owner’s dwelling house, whether or not the tenants have separate washing and cooking facilities. But the relief does not extend to property which, although it may be part of the same building, forms a dwelling house separate from that which is, or has been, the owner’s (for example, a fully self-contained flat with its own access from the road).

Notes

The text of SP 14/80 above is as it appears in HMRC’s Statements of Practice as published on 30 January 2012.

This statement is to be read subject to the March 1982 rebasing provisions in TCGA 1992, s. 35, 36 and Sch. 3, 4.

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Replying to Wanderer:
By Paul D Utherone
18th Oct 2018 09:19

Where are you getting "One lodger, good. More than one, bad" from in the SP? I can't see it, other than the fact that it only refers to lodger in the singular.

Might not the Interpretation Act (something HMRC delight in referring to for delivery of notices to file, etc.) s 6(c) not cover that - other I suppose than that this is an SP not an Act?

6 Gender and number.

In any Act, unless the contrary intention appears,—
(a)words importing the masculine gender include the feminine;
(b)words importing the feminine gender include the masculine;
(c)words in the singular include the plural and words in the plural include the singular.

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Replying to Paul D Utherone:
By Red Leader
18th Oct 2018 13:19

CG64702:

"SP14/80 sets out the position for CGT purposes where an individual lets out all or part of their home. Where a lodger lives as a member of the owner’s family, sharing their living accommodation and taking meals with them, no part of the accommodation should be treated as having ceased to be occupied as the owner’s main residence. The relief should not be restricted at all.

The reference to a lodger is important. The domestic arrangements of individuals are endlessly variable and you must aim to operate the statutory code flexibly and fairly. A distinction was intended by the Statement of Practice between a person who takes a single lodger into their home and a person who is running a lodging house as a business. The relief available to the latter should be restricted. The Board considers that the number of lodgers is a sensible and practical way of distinguishing between these two cases. So you should not consider any restriction of relief where there is a single lodger but should restrict the relief to an appropriate extent where there is more than one lodger."

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Replying to Red Leader:
By Paul D Utherone
25th Oct 2018 10:36

Fair enough, but one would hope that sense based on circumstances and actual facts of the case, but I suppose this is tax and HMRC we're talking about

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Portia profile image
By Portia Nina Levin
18th Oct 2018 14:05

Don't forget that to the extent that a restriction to PPR applies, you still have the lettings extension to the relief, which may keep any gain exempt.

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Replying to Portia Nina Levin:
By Ruddles
18th Oct 2018 14:25

In English, please?

EDIT - don't worry, I've worked it out :)

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Replying to Ruddles:
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By Wanderer
18th Oct 2018 14:17

Ruddles wrote:

In English, please?

Up to £40,000 or £40,000 x 2 may be exempt as a result of the lettings relief.
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Replying to Wanderer:
By Ruddles
18th Oct 2018 14:25

Obviously.

But, in the context of Portia's words, what does "up to" mean? :)

EDIT - got it :)

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Replying to Ruddles:
Portia profile image
By Portia Nina Levin
18th Oct 2018 14:36

T-o
t-h-e
e-x-t-e-n-t
t-h-a-t!

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Replying to Portia Nina Levin:
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By Tax Dragon
18th Oct 2018 14:41

Portia Nina Levin wrote:

Don't forget that to the extent that a restriction to PPR applies, you still have the lettings extension to the relief, which may keep any gain exempt.

Are you sure? If s224 restricts s223 to the part of the gain apportioned to the part of the property which is not exclusively used for business purposes, does that exclusion not include s223(4)?

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Replying to Tax Dragon:
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By Wanderer
18th Oct 2018 15:01

But S224(2) says ... the relief given by section 223 may be adjusted in such manner as the Commissioners concerned may consider to be just and reasonable.

The SP and the links I've given above give an indication as to what HMRC consider is just and reasonable.

I'm with Portia on this one.

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Replying to Wanderer:
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By Tax Dragon
18th Oct 2018 15:25

Yes, if the part of the property that is let to lodgers (going with HMRC’s view that this brings s224 into play) has at some point been part of the OMR (so that we are looking at s224(2) not s224(1), then the part of the gain exempt due to that OMR use of the business part is doubled under s223(4) [up to the maximum of £40,000]. But that’s a lot of assumptions; Portia was stating as blanket fact.

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Portia profile image
By Portia Nina Levin
18th Oct 2018 15:06

So, what you seem to be suggesting is that if I make a gain of say £100,000 on a dwelling that I have owned for 10 years, and which I occupied for the first 5.5 years and all of it is then used exclusively for letting for the last 4.5. Then the calculation goes something like this:

Part of gain that cannot be exempt £100,000 x 4.5/10 = £45,000.
PPR exempt gain £55,000 (£100,000 - £45,000) x 7/10 (5.5 + 1.5 = 7) = £38,500.
LR exempt gain£55,000 x 3/10 = £16,500.

Therefore taxable gain = £45,000.

No. I don't think that that is correct.

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Replying to Portia Nina Levin:
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By Tax Dragon
18th Oct 2018 15:23

Substitute 55% of the property used as OMR 45% used exclusively for business.

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By Portia Nina Levin
18th Oct 2018 15:28

Is letting not a business?

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Replying to Portia Nina Levin:
By Ruddles
18th Oct 2018 15:46

Usually, yes

However, HMRC do seem to take the view that it is not for these purposes (in part of their guidance at least) - when discussing s224 they refer specifically to trade, business, profession or vocation. When dealing with letting relief, they refer instead to s222(1) - implying that letting is not included in trade, profession, vocation or business. But, that is inconsistent with their comment that letting relief may be available for multiple lodgers, (which brings s224 into play), implying there that such letting is in fact a business.

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Replying to Ruddles:
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By Tax Dragon
18th Oct 2018 15:46

I may have to ask Babelfish what all this means in English soon.

My point was that (the OP at least) has not given any indication of whether we would be looking at s224(1) or s224(2) - if that section is in play.

Assumptions have crept in somewhere.

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Replying to Tax Dragon:
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By Wanderer
18th Oct 2018 15:31

Isn't that a completely different scenario though?
Portia said "to the extent that a restriction to PPR applies". If part has been used exclusively for business then PPR doesn't apply to that part anyway?

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Replying to Wanderer:
By Ruddles
18th Oct 2018 15:41

But what if the 'business' is a letting business?

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Replying to Ruddles:
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By Wanderer
18th Oct 2018 15:52

Ruddles wrote:

But what if the 'business' is a letting business?


Don't see it makes any difference? If a part has been used EXCLUSIVELY for ... business.. then 224(1) says 223 only applies to that other part.
Now if the part (say 2 rooms) was occupied as PPR THEN let out then 223 comes into play. Quite different from the scenario when the 2 rooms have ALWAYS been used for business.
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Replying to Wanderer:
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By Tax Dragon
18th Oct 2018 15:56

My point precisely.

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Replying to Tax Dragon:
By Ruddles
18th Oct 2018 15:27

The problem here is that HMRC 's guidance is inconsistent. On the one hand, they appear to make a clear distinction between letting and business use, which would tie in with your interpretation - on the other, they appear to suggest that letting is included as a 'business' for the purposes of 224 (and of course there are references elsewhere in the tax codes to property businesses).

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By Portia Nina Levin
18th Oct 2018 15:46

Letting whether it be the whole property, part of the property, or a couple of rooms to lodgers is either a business, or it isn't.

If it is then either s 223(4) can never be relevant, or it must be intended to apply to the taxable gain (attributable to the letting) that s 224(1) leaves behind.

If it isn't, then s 224(1) is not in point in any letting case, and PPR would continue to be in point where there are lodgers.

We're agreeing with each other, incidentally, I think. I was just elaborating.

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Replying to Portia Nina Levin:
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By Tax Dragon
18th Oct 2018 15:48

Portia Nina Levin wrote:

If it is then either s 223(4) can never be relevant...

Yes it can - in a s224(2) scenario.

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Replying to Tax Dragon:
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By Portia Nina Levin
18th Oct 2018 16:31

I don't agree. The "just and reasonable manner" in s 224(2) should be consistent sit s 224(1).

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By Tax Dragon
18th Oct 2018 16:52

You've lost me. If s224(2) sits as part of s224(1) [is that what you mean?], why does it have extra preconditions?

Both seem to sit quite comfortably on their own, in my view.

And there is no inconsistency in that.

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By cfield
22nd Oct 2018 12:56

I've had a few of these lodger cases over the years, and in the main it is fairly easy to tell if someone is a Rigsby or not. In most cases, the lodgers have pretty much free rein of the bathroom, the kitchen and even the fridge. They do their share of household chores and may even contribute towards gas, electricity and grocery bills. In many cases it's more like a house-share arrangement than lodgers. It may not quite be the same as "living as a member of the family" as the SP suggests but it's good enough to avoid any suggestion of a letting business in my view.

HMRC's internal guidance that 2 lodgers should always be treated as a letting business is far too simplistic. It is not "a sensible and practical way of distinguishing between these 2 cases" at all. They say themselves that "domestic arrangements of individuals are endlessly variable" and that the law must be applied "flexibly and fairly". They then go on to advocate the exact opposite.
Instead of saying "restrict the relief" they should say "consider restricting the relief". At least that would tell their staff the position is not as black and white as they seem to think.

I wonder how many people over the last 3-4 decades have been misled into paying CGT bills they didn't really owe as a result of this harsh and lazy interpretation of the law.

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