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New Letting Relief – Sharing with Two Tenants

When is letting of residential accommodation considered to be in the course of a trade or business?

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I am trying to get my head around the new lettings relief provisions applicable for 2020/21 onwards for a client who sold their home in June 2020 and had been letting part of the home to two lodgers/tenants.

The client has lived at the property for the whole period of ownership. During this period, they rented out:

  • An attached small annex with shared entrance, no internal locks, shared utilities, etc (i.e. not a separate dwelling), and
  • One bedroom to another lodger.

On the face of it, lettings relief should still be available to my client as HMRC say, on their main website, that it remains available “if you lived in your home at the same time as your tenants”.

However, the underlying legislation says letting relief is not available if the letting has been undertaken in the course of a trade or a business.

How do I determine if they are considered to be undertaking a trade or business? Is more than one lodger/tenant automatically a business (HMRC examples would indicate that isn’t always the case)?

Should the client just claim the letting relief on the basis that they aren’t running a business (they certainly don’t think they are) and then provide a full disclosure as to why it has been claimed? I am assuming HMRC will query all lettings relief claims made in 20/21 onwards.

Replies (25)

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By Rweaver
07th Sep 2020 14:00

Surely they are engaged in a UK property business?

That being the case, to the extent the dwelling is used exclusively for that business (the annexe and bedroom) PPR relief is denied owing to s.224(1).

This is where s.223(4) steps in and saves the day [to the ‘usual’ limits] in respect of the “chargeable gain by reason of the letting”.

I don’t see that this scenario is impacted by the 6/4/20 changes.

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Replying to Rweaver:
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By ChrisKM
08th Sep 2020 09:29

Rweaver wrote:

Surely they are engaged in a UK property business?

That being the case, to the extent the dwelling is used exclusively for that business (the annexe and bedroom) PPR relief is denied owing to s.224(1).

This is where s.223(4) steps in and saves the day [to the ‘usual’ limits] in respect of the “chargeable gain by reason of the letting”.

I don’t see that this scenario is impacted by the 6/4/20 changes.

Thanks for the response, it is much appreciated.

The annex isn't a seperate dwelling but it was likely built to rent out, so I guess it does sound like a property business (it is the annex that was causing me to question this whole thing).

If that is the case, though, surely the 6/4/20 changes do bite, in that lettings relief would have been available pre 6/4/20 but is now no longer available as s.223(4) has been omitted/amended and is now only avaliable when:

(a) part of the dwelling-house is the individual’s only or main
residence, and
(b) another part of the dwelling-house is being let out by the
individual as residential accommodation otherwise than in the
course of a trade or business.

Thanks again.

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By SteveHa
08th Sep 2020 10:52

Surely 223B(3) covers this and permits lettings relief up to the full £40,000.

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By richard thomas
08th Sep 2020 11:46

I am having a bit of difficulty with this post. The factual position seems to be that client owns a property and occupies part as his private residence and lets out two parts to lodgers.

The change in law made by FA 2019 was to limit letting relief to cases where it was not the whole property that was let so part had to be occupied as a private residence by the owner, but this is the case here.

The OP though says that the “underlying legislation” says letting relief is not available if the letting has been undertaken in the course of a trade or a business. Try as I might I can’t find this limitation in the legislation: perhaps the OP would point us to the relevant provision.

The position of lodgers is covered in Statement of Practice 14/80 which was about the then newly introduced lettings relief which became s 223(4). It says:

2 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 is not restricted at all.

And

4 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 HMRC 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 HMRC 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).

Since the “annex” does not seem to form a separate dwelling house then lettings relief would seem to be available for both parts of the house.

Rweaver suggests that s 224(1) applies because the client is “engaged in a UK property business” and then s 223(4) steps in to save the day. This is mistaken on at least two points.

The concept of a property business is relevant for income tax only, except to the extent the concept is specifically applied by TCGA or other non-income tax provisions. See s 263(1) ITTOIA. I would agree that for income tax purposes the client has a UK property business, but that covers both an actual business of generating income from land and in addition any transaction entered into for that purpose “otherwise in the course of business".

Section 224(1) though refers to part of a dwelling-house “used exclusively for the purpose of a trade or business, or of a profession or vocation”. This wording was there long before the reform of Schedule A in 1996 which first referred to “a property business”. And in fact the post-FA 2019 wording of s 224(1) explicitly distinguishes between the parts to which that exclusion of relief applies and the parts to which s 223B lettings relief applies.

If Rweaver was right then lettings relief would never seem to be available, as if s 224 included any part of a dwelling let out whether in an actual business or not, it would always trump s 223B.

The OP should ignore that reply and not worry about whether letting the annex amounts to a property business.

In any case I would argue that when s 224(1) refers to a part being used exclusively for the purpose of inter alia a business, it does not apply to properties being let even in the course of an actual property investment business but only to parts used for the management of the business. Owen v Elliott (63 TC 319) supports that: there use as a hotel qualified for lettings relief.

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By ChrisKM
08th Sep 2020 15:12

Richard, thank you so much for that detailed reply.

And your reply has caused me to delve further and I can now see what I have done.

The original draft legislation for the new lettings’ relief proposed the new condition as follows.
(a) part of the dwelling-house is the individual’s only or main residence, and
(b) another part of the dwelling-house is being let out by the individual as residential accommodation otherwise than in the course of a trade or business.

But your post has prompted me to look at what was enacted in the Finance Act 2000, and in that legislation, the “otherwise than in the course of a trade or business part has gone.

So I am a fool, but problem solved I think?

One last issue revolves around the lodgers versus letting relief. I was aware of SP14/80, but HMRC indicate in their manual at CG64702 that “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. You should not consider any restriction of relief where there is a single lodger but should consider doing so to an appropriate extent where there is more than one lodger, whilst bearing in mind that if relief is restricted lettings relief may be due”.

So, it seems to me that when there is only one lodger resident, PRR does not need to be restricted, but whilst there are 2 lodgers, I should go down the letting relief route which still remains available?

Sorry again for posting out of date info about the new letting relief provisions.

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By Tax Dragon
08th Sep 2020 20:30

This 'new' lettings relief seems to be revealing issues with all our understandings of the PRR provisions. I think I will have to re-evaluate a couple of my recent contributions (on what "occupation" means and on s224) in the light of Richard's insights above.

The way I see the rules (in the context of this OP) is:

1) s222(1) – ask what was sold; if a dwelling-house that (for simplicity) the taxpayer lived in, exemption for the gain applies [point to note: it doesn't matter whether the taxpayer for example never went upstairs – the thing sold is a dwelling-house and the taxpayer lived in it];

2) s223 tells you how to calculate the exempt amount – if the taxpayer lived in the house throughout, s223(1) tells you the whole gain is exempt (even if s/he never went upstairs, never had any furniture upstairs, never did anything with the upstairs space... or indeed, even if s/he let the upstairs space, residential or otherwise);

3) in short, I see no restrictions in Ss222 or 223 based on use (or lack of use) of bits of the property: looking just at these sections, the OP's client would have a gain that was fully exempt, because s/he sold a dwelling-house that s/he lived in throughout;

4) the usage restrictions are all in s224:
a) s224(1) apportions the gain into a part qualifying for the exemption and a part not; as Richard explains, s223B cannot apply to the "part not";
b) s224(2) talks about changes of use, including change "for any other purpose", and a consequent "just and reasonable" adjustment to the exemption (including, curiously, the amount exempted by s223B);
c) we're not interested in the rest of s224 in this thread.

5) s223B kicks in to exempt a limited amount of the gain that is chargeable (in the old lingo) "by reason of the letting" – and the only situation I can see now in which s223B applies (i.e. there is a gain by reason of the letting) is when s224(2) has applied to restrict the exemption that would otherwise apply.

However, I distinguish this answer from Richard's because I think s224(1) could sometimes apply. Suppose you bought a house with a sitting tenant (let's put them upstairs in my opening example). You never go upstairs. You sell the house. They're still there. (Let's hope they are still alive… well, the rent has been paid, anyway!) I think s224(1) could apply here. In contrast, s224(2) could not, because there has not been a change of use.

Applying all of this to the OP's case…
1) it's quite possible that the annexe (which was built to let) is excluded by s224(1) [therefore not covered by s223B]
2) but the adjustment, if any, for the bedroom (which may, say, have been unoccupied when bought, then let, then sold unoccupied) would be under s224(2) [and if so the corresponding gain covered (or partly covered) by s223B].

(I'm not saying that's right; just that it seems to be possible and that there could be different treatment of the two let spaces.)

One new point of confusion for me (open to clarification on this – and indeed all of this post): use of "is" in s224(1). I assume this has to be read as "is used throughout the period of ownership" or similar. I am aware (this was one of the threads where I may have misspoken) that the use of "is" in (old) s222(7)(a) had significant impact on interpretation, but a similar reading in s224(1) seems to me to make no sense.

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Replying to Tax Dragon:
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By ChrisKM
09th Sep 2020 08:06

Tax Dragon wrote:

Applying all of this to the OP's case…
1) it's quite possible that the annexe (which was built to let) is excluded by s224(1) [therefore not covered by s223B]
2) but the adjustment, if any, for the bedroom (which may, say, have been unoccupied when bought, then let, then sold unoccupied) would be under s224(2) [and if so the corresponding gain covered (or partly covered) by s223B].

(I'm not saying that's right; just that it seems to be possible and that there could be different treatment of the two let spaces.)

Thanks very much for the response Tax Dragon.

Your answers have confused me though. You seem to be saying that the annex would not qualify for letting relief under s223B due to s124(1) being in play, but the single room would fall under under S124(2)?

Given what Richard said I was not concerned about s124(1) at all, but your mention of S124(2) has worried me more for the annex as it was a conversion of the existing garage, although I still don't see how that makes a difference provided the annex is not a sperate dwelling (which it isn't)?

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By richard thomas
10th Sep 2020 20:56

I agree with much of what Tax Dragon says, and especially the way of looking at legislation ie consecutively (assuming it’s well drafted). What he (or she) said has prompted me to look again more closely at the legislation.

The starting point is, I agree, s 222(1) as if there isn’t a disposal within that section you don’t have to go any further – you just return the gain and try to find some other exemption or deferral if you can.

The only requirement in s 222(1) is that the asset disposed was a dwelling house or part of a dwelling-house and the dwelling house has at any time been the individual’s only or main residence.

This means that the extent of the dwelling house may have to be considered at this point. An annex which is not detached from or with a separate entrance is very unlikely not to be part of the dwelling. (These sort of issues are rife in the VAT self-build relief). Even a wholly detached annex may be within the scope of dwelling house. (Many of the cases involve “outbuildings” like lodges and cottages and questions arise about the curtilage).

In the OP’s case there is no issue here – the whole property is a dwelling-house.

I agree with Tax Dragon about s 223 or at least about s 223(1) to (3B). This purely determines whether the whole period’s ownership qualifies and is irrelevant on the facts given by the OP. But I don’t think you can ignore the fact that s 223(4) existed as lettings relief from 1992 (it dates from 1980) to 5/4/2020.

Section 223(4) assumes that the letting of the whole or part (at any time) might result in there being a chargeable gain (CG). In other words, s 223(1) would not apply to remove all or part of the gain from being a chargeable gain (which is the effect of s 223). That would certainly be the case if the letting was of the whole dwelling as the seller would not have been resident. But why would there be a CG (s 223(4) apart) if the seller resided in the rest of the dwelling? It must be because the let part was not part of the seller’s residence.

And before you can apply lettings relief in s 223(4) you need to know what the chargeable gain is on the let part, because it must be tested against the second of the two limits, the amount of the exempt gain (ie the total gain less the chargeable gain on the let part) and £40,000.

From 6 April 2020 you have to look at s 223B. This is much clearer than s 223(4) about how the gain from which the relief is given arises. Subsections (2) and (3) say:

(2) The condition is that—
(a) part of the dwelling-house is the individual’s only or main residence, and
(b) another part of the dwelling-house is being let out by the individual as residential accommodation.

(3) The part of the gain that is within this subsection is the part that (but for subsection (1)) would be a chargeable gain by reason of the fact that, at the times in the individual’s period of ownership when the condition in subsection (2) is met, the individual’s only or main residence does not include the part of the dwelling-house that is being let out as residential accommodation.

You can believe me or not, but I drafted the bit about s 223(4) before I studied in depth what s 223B(2) and (3) says! Thus it is plain that for lettings relief to apply there must be a chargeable gain on a part of the dwelling house in which the seller did not reside.

This is where SP14/80 comes in. It uses the phrase “occupied as the owner’s main residence” – indeed the SP is headed “relief for owner occupiers”. “Occupy” and cognate expressions are used in sections 222 to 226B, but not expressly in relation to the owner of the dwelling house, save in s 224(2) (as to which see below). It is used about the surrounding land in s 222(1)(b) and about beneficiaries of trusts who “occupy it under the terms of the settlement”. But it seems to me a sensible benchmark, especially given s 224(2).

The SP first makes the sensible concession that a mere lodger is not in occupation of any part of the dwelling, so can be ignored for the purposes of lettings relief. The SP then differentiates between, on the one hand, the letting of a set of rooms without structural alteration even if the tenants have separate washing and cooking facilities (but beyond a mere lodger) and on the other hand where the part let is a separate dwelling house, fully self-contained and with its own access.

Both of these situations involve the owner giving up occupation and so having a chargeable gain. In the first case lettings relief is available and in the second case it is not.

Section 224(3) applies to make any necessary apportionments to the exempt amount by using the good old j & r basis.

Section 224(1) can now be seen in its proper perspective. It was clearly aimed in 1965 at the “flat over the shop” case. The shop would be in the occupation of the seller and he could be said to reside in it as well as in the flat. Section 223B is wholly irrelevant (as was s 223(4)) to the shop part as it cannot be said to have been let as residential accommodation.

Where s 224(1) applies to the trade or business use of the main residence of the seller it only limits the gain which otherwise be exempt. It doesn’t affect the gain on the let parts to which the lettings relief may apply.

I realise I am now diverging from Tax Dragon’s analysis and probably my previous own, but nothing beats a very close reading of the legislation (including the SP which can be relied on, unlike HMRC Manuals). The revelation was in my realisation that there are two reliefs – s 223(1) and s 223B (previously s 223(4)). There is an exemption on the whole or part of the gain from a disposal by an individual of the parts of the dwelling house in which they resided (= occupied) and a limited relief against the gain on the parts they did not reside in. Section 224(1) applies to limit the first gain.

The only fly in the ointment here though is the change made by s 24(6)(b)(ii) FA 2020 to s 224(1) substituting the words “sections 223 and 223B” for “section 223”. In my view when lettings relief was in s 223(4) the reference to s 223 in s 224(1) was only to s 223(1) to (3). It was in my view unnecessary to refer to s 223B for the reasons I have given, the different nature of the exemptions/reliefs. I find it impossible to think of a situation where s 224(1) could also apply to a gain on the parts let as residential accommodation.

Section 224(2) does as mentioned refer to occupation. It is capable of applying when part of the dwelling house starts or ceases to be used for trade etc, and when part of the dwelling house starts or ceases to be let as residential accommodation. But for the reasons given it can’t simultaneously apply to both uses. In relation to the OP’s post of 9/9/20 if there was a conversion of a garage to an annex, then that does affect the exemption to his client’s advantage. Before the conversion the garage was exempt as part of the dwelling house occupied by the client. After it was not, so an apportionment is needed.

Applying this to the OP’s factual situation, any gain on the bedroom used by the lodger is exempt under s 223(1) – SP 14/80. The letting of the annex gives rise to a chargeable gain, but lettings relief should be available. Whether that covers the entire gain cannot be stated as we do not know the figures.

The reference by the OP to “trade or business” is irrelevant. This is a reference to s 224(1) and I have explained why this does not apply.

Finally, for Tax Dragon, while “is” in s 224(1) may mean “is at the time of disposal”, then s 244(2) would override that where there had been a business use which had ceased.

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Replying to richard thomas:
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By ChrisKM
14th Sep 2020 16:43

Many thanks again for this analysis.

I remain confused about S224(2) as it still seems to read to me that S223B cannot apply to that part of the gain arising after the garage converts to let accommodation that was never resided in by the owner.

Having said that, if they had bought the property with the annex already in place (i.e. no subsequent conversion needed to take place), they would never have therefore resided in that part of the dwelling at all; yet HMRC’s own examples allow S223B relief to be claimed when a percentage of the property was let for the entire ownership period (see CG64736). So, confused still.

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Replying to ChrisKM:
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By richard thomas
16th Sep 2020 10:23

Assume some simple figures:

Property bought in 2010 for £500,000 to include garage.

In 2015 garage converted to annex which is let. (assume garage worth £50,000 at that point).

In 2020 whole property sold for £600,000 with annex being worth £70,000.

Gain on property in 2020:

Disposal proceeds £600,000
Cost £500,000
Gain £100,000.

S 223(1) applies in principle to the gain on the dwelling-house, but for 5 years part of the property was not in the occupation of the owner. Section 224(2) applies because there has been in a change in what is occupied as the individual’s residence so a j & r apportionment is required.

That might most justly and reasonably be done by excluding the gain on the annex while let, so £20,000 (£70k - £50k), making exempt gain £80,000 and taxable gain £20,000.

Then, wholly separate from the s 224(2) exercise, you have to decide if lettings relief is available for the £20,000 (and in the circumstances you described it probably is).

As I mentioned in my post of 8/9 @20:30 I think the reference to s 223B added by FA 2019 is wrong.

As to your last paragraph, the point is that any part occupied by a tenant is not a part in which the owner resides, so can never be exempt under s 223(1). Section 223B assumes that to be the case and that there is a chargeable (ie non-exempt) gain on the non-occupied part, and allows lettings relief to the extent the limits are not breached. CG64736 is quite right.

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Replying to richard thomas:
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By ChrisKM
17th Sep 2020 15:09

Hi Richard

Thanks for taking the trouble to give that example; that was very useful.

Just to check that my poor brain is getting it, the purpose of 224(2) is therefore to stop a simple straight-line apportionment being used where it would give an inappropriate result?

i.e. in your example, if the £100k gain arose solely due to the building of the annex (not likely I know), S224(2) steps in to say you would need to apply S223B to the £100k rather than just apportion the £100k to the letting by saying, for example, “the letting was 50% of the time for 20% of the property, so only 10% of the £100k needs to be subjected to S223B”?

Sorry to keep bumping this.

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By Tax Dragon
17th Sep 2020 17:44

If I may add a couple of points (hopefully to clarify and not to confuse) and then take the opportunity to respond to Richard's post on 10 September, which is deserving of considerable attention. (OMR legislation is something that ought to be easy to understand, but I find myself continually deficient in full appreciation of its nuances... and the fact that cases keep going to court comforts me with the thought that it's not just me that finds it difficult!)

1. Your question about s224(2) stopping straight-line apportionment is interesting. CG64670 and CG64771 (and maybe some others) might be read as suggesting that HMRC believes that straight-line is the only correct approach. I too would value Richard's insights on that point. (This isn't the only place where I wonder what actually is just and reasonable!)

2. A garage is part of a dwelling house, so some of your previous comments on the prior non-residential use are not correct. (Case law has expanded on what constitutes a dwelling-house, as the OMR legislation does not define this term.) Incidentally, this means that any adjustment for the annexe is under s224(2) for change of use; any comments I made before suggesting otherwise were made before you advised that the annexe was a conversion.

I note Richard's different suggested treatment of the let bedroom and the let converted garage and I follow the logic. Whether CG64702 suggests that HMRC would take an alternative view is not clear to me. If there was no tax at stake (due to an application of s223B) if you adjusted for both the bedroom and the annexe per s224(2), I think I would probably do that, for simplicity. If there was tax at stake (the amount qualifying under s223B being less than s224(2) adjustment), then I would consider Richard's arguments very carefully - and in view of my uncertainty over CG64702, consider a WSN.

Going back to Richard's divergence from my (and probably his previous) analysis of the sections, if I have correctly understood Richard's analysis, he concludes that a dwelling-house qualifies for relief under Ss222-3 to the extent (and only to the extent) that it was occupied as the OMR. Thus, when you reach s223B (or, formerly, s223(4)), in a situation where part of the house has been let (and, thereby, not been occupied by the owner), you find you have a gain to which letting relief might apply.

I still see no such restriction in any part of these sections; nor am I aware of a restriction within these sections having been confirmed by case law. Such restrictions, as I said before, seem to me to derive from s224 and from nothing else. Specifically, I think the answer to Richard's "But why would there be a CG (s 223(4) apart) if the seller resided in the rest of the dwelling?" is not "It must be because the let part was not part of the seller’s residence" but rather "because s224 says so". That fact that s224 comes after s223B (and, formerly, s223(4)) does not, in my view, impact on the interpretation of the earlier sections. Specifically too, s222(1) does not refer to the disposal of a "residence" but rather of a dwelling-house.

My view therefore appears to continue to diverge from Richard's (though not in a way that I think has any impact on your client's situation).

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Replying to Tax Dragon:
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By whitevanman
17th Sep 2020 20:28

I would comment only on the point about CG64702 (but will stay a little!).
I don't think there is any doubt that the guidance agrees what Richard has said, albeit slightly unclear by references to "the relief". If the homeowner takes in a lodger, there is no restriction to the "main" OMR relief. If however there are several lodgers, there is a restriction but the resulting gain is subject to lettings relief.
I think it is worth looking also at CG64311 which sets out the HMRC approach to 3 scenarios. The single lodger (as above), the letting of rooms which are not therefore occupied by the homeowner (lettings relief applies) and the separate dwelling for which no relief is due. The garage conversion could arguably be within either the second or third of these. It would depend on the precise facts but the circs outlined by the OP are clearly within the second.

Edit much as I might like to "stay" a little, I really typed "stray" - damn predictive text!!

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Replying to whitevanman:
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By Tax Dragon
18th Sep 2020 00:25

I confess I have been trying to picture the annexe (since being told of its former life as a garage) based on properties around here. My favourite would be the house opposite, which has a garage next to the kitchen where you might expect a front room to be. Convert that, it's basically just another bedroom. Other houses here have garages on the side, maybe that's a bit more annexey? Others have detached garages at the ends of gardens. It's really quite varied.

To your point about CG64702, in the context of the house opposite, I don't see that someone renting the garage (which I have pictured as converted to a bedroom) would be any different from someone renting a spare room upstairs. Two lodgers and CG64702 instructs consideration of an application of s224(2) - presumably to both let rooms, not just one.

Now I know the OP is not talking about the house opposite, because that garage has not been converted. (Incidentally, the husband of the house spends as much time in the garage as he does the kitchen... just making a point to the OP as to occupation, not that I see it as relevant.) However, he (the OP) does mention that the tenant shares the facilities of the main house, as a lodger might. It sounds very much to me like the two-lodger situation.

And try as I might, even supposing (contrary to how I read the facts provided) the annexe to be self-contained, but part of the dwelling-house, I cannot see the logic of excluding the lodger's bedroom upstairs from the s224(2) adjustment, when you would do (per CG64702) in the case of the house opposite, if I have understood you correctly.

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Replying to Tax Dragon:
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By whitevanman
18th Sep 2020 02:01

I wasn't going to get involved with this one but here goes!
I think the issue is firstly about the word "occupied". SP14 sets out that HMRC regard the homeowner as occupying the whole of the property where there is 1 lodger. So, in those specific circs, no restriction to the "main" exemption.
However, where there are two or more lodgers, they consider the position to be different and a restriction will apply (but lettings relief may then be due).
There is no clear statement as to why that different view is taken. There are 2 possibilities (as I see it). Either they don't think the whole is then "occupied" (as OMR) by the homeowner or they consider the property is being (partly) used for a lodging house business and again not therefore (wholly) occupied as the OMR. Not sure if there is a real difference between these and it matters not for present purposes. The result is the same.
So, in the OP's case, if there are 2 lodgers, it would appear that HMRC would consider the "main" exemption should be restricted (by reference to the 2 lettings) and lettings relief may be due.
As to the garage/annex, I would agree that, if converted to a bedroom, it would be no different than a bedroom elsewhere in the house. The treatment would, again, depend on the precise facts and terms of the letting(s). In the case of the OP I agree there would be 2 lodgers and restriction applies to both.
On a wider note, CG64311 sets out the position (as HMRC see it).
What I think you have to bear in mind is the difference between the lodger referred to in SP14 and the tenant of rooms (as I will call it) referred to in CG64311.
In the case of a single lodger, sharing the family facilities etc, the homeowner is accepted as still "occupying" the let part. If however a set of rooms or flat is let, that is not the case (hence a restriction and possible lettings relief). If however there is a separate access etc for the "annex" it is likely that it will cease to be part of the main dwelling (even if physically attached) and so will not qualify for any relief.

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Replying to whitevanman:
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By Tax Dragon
18th Sep 2020 07:40

May I focus on the first point? "I think the issue is firstly about the word 'occupied'". I agree.

But where does that test come from? I can see it's there by the time you get to s224(2), which provision does talk about what is occupied as the residence. But I haven't managed to pin down any such requirement in either s222 or s223.

What am I missing? (There is of course a requirement to live in - to occupy - the dwelling-house to get past s222(1). But I refer you back to my first comment above for my thoughts on that.)

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Replying to Tax Dragon:
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By Tax Dragon
18th Sep 2020 08:39

Pondering that question, I think the requirement in s224(2) is sufficient. [I don't see the logic of bedroom 1 + bedroom 2 let out, neither qualifies (other than for lettings relief) but upgrading bedroom 2 to an annexe puts bedroom 1 back into occupation, but if that's how HMRC wants to interpret it, then who am I to argue?]

So I think ultimately my views and Richard's probably do converge, but we take slightly different logical routes to get there. I can't reach the conclusions without s224; I took Richard to be saying that the occupation restriction/requirement derives from/is inherent in Ss222 and 3 themselves, as demonstrated by the (former) existence of s223(4).

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Replying to Tax Dragon:
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By whitevanman
18th Sep 2020 10:21

Not sure I agree your first para (if indeed, I read it correctly).
SP14 is very specific. If there is 1 lodger, who shares the family home etc (as described), HMRC accept that the homeowner continues to occupy the whole dwelling as OMR.
This does not however apply if there is more than 1 lodger. In those circs, it appears, they take the view that part of the property (in the case you appear to envisage, 2 bedrooms) is not so occupied. Hence a restriction and possible lettings relief.

The bit about upgrading to an annex is, I think, also a mis-interpretation. Again it is about occupation. If the annex is a part of the dwelling, but let as a flat etc, the occupation is not by a lodger and therefore not within SP14. The inference here is again that the annex / let rooms etc are not occupied by the owner as OMR so again a restriction applies (with possible lettings relief).
You appear to raise an interesting point (or at least your comments lead onto this), what happens if there is 1 lodger and then also, a letting of an annex etc to someone who is not a lodger? HMRC guidance does not cover that but I rather suspect we would be in the territory of 2 lodgers in that the evidence points towards a business and parts of the property being occupied other than as OMR. Again, it is not about conversion etc. Rather it is about the terms on which the property is occupied etc.
I think the only relevance of "conversion" is that, if a separate entrance etc is created, that part becomes a separate dwelling house and therefore ceases to be part of the OMR.

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Replying to whitevanman:
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By Tax Dragon
18th Sep 2020 10:37

whitevanman wrote:

You appear to raise an interesting point (or at least your comments lead onto this), what happens if there is 1 lodger and then also, a letting of an annex etc to someone who is not a lodger?

To be fair, it was the OP raised that point (perhaps you need to read the thread!) and Richard who suggested in response that you might have lodger's accommodation as continuing to be occupied by the owner while the annexe ceased to be so occupied.

My (main) point is simply that the only place I can find mention of that which "is occupied as the individual’s residence" is in s224(2); absent that provision, I do not think any restriction would be due for either a let bedroom or annexe (so long as the annexe was part of the dwelling-house and not a self-contained distinct unit). Why so? Because I do not see that s222 and/or s223 provide for an exemption only to the extent that a dwelling-house is occupied as a residence. (See again my first post.)

I am happy for you to tell me I am misinterpreting the sections overall, but (having gone into it in this much detail) I would like to understand which bit I have misunderstood, if you can help there.

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By richard thomas
18th Sep 2020 21:11

I’d just like to add a few comments after the fascinating rallies between Tax Dragon and Whitevanman.

The main reason we are arguing about this relief, 58 years after it first appeared in UK tax law (most other countries have something similar), is that two important concepts are not defined: “dwelling-house” and “residence”. Nor is “letting as residential accommodation” 40 years after its introduction.

Case law has had an important impact on the reliefs. Dwelling-house has been given a liberal interpretation for those with large houses and grounds with cottages and other buildings in them, and it is clear that physical occupation of a cottage or annex by an employee does not remove the PRR exemption. “Occupation” has been a word bruited about by judges, not always I think distinguishing between physical occupation and legal occupation.

I continue to be of the view that the individual seeking PRR will have had to have been in legal occupation at some time in relation to all the parts of the dwelling-house to which PRR is to apply, despite the word or cognate expressions not appearing in s 222 or 223 (or their predecessors). I think that s 224(2) simply reflects the fact that occupation is an important aspect of residence.

This is reflected also in SP 14/80 in its remarks about lodgers who share facilities with the owners.

I think the second paragraph of CG64702 is a bit misleading. It purports to characterise what the SP says as distinguishing between on the one hand “a single lodger” and on the other a person who is “running a lodging house as a business”. The SP does no such thing. It says in Part 2 that IR/HMRC will not regard granting a licence to a lodger (it doesn’t say “single”) as compromising PRR. In Part 4 it is distinguishing between letting part of the dwelling house to tenants who have their own facilities, which will allow lettings relief, and a separate annex with its own entrance, which will not (because it not part of the dwelling-house). SP 14/80 says nothing about “running a lodging house as a business” (which sounds a very Dickensian occupation to me). It is however true that if part of the dwelling-house is being run as a business, PRR cannot apply, but PRR will also not apply to all other “lettings”, whether run as a business or not.

CG64702 seems also to be an attempt to limit as much as possible Part 2 of SP 14/80. I do not know why they have added the adjective “single” to lodger. Do they mean no couples in one bedroom? Or do they mean no more than one room can be licenced to lodgers. What SP 14/80 is actually saying about lodger(s) is that they are not in occupation – the owner is, and that must apply whether there are 2 (or more) people in one room or 2 or more rooms in which there are lodgers.

But I do not think CG64702 is saying in terms that having lodgers in two or more rooms is automatically going to lead to a denial of PRR. It says that officers should consider denying PRR in an appropriate case, and it cautions against trying to limit PRR in this situation because the same result may be obtained through letting relief. It seems to me to be sensible advice.

HMRC took the view in 1980 that there could be no lettings relief for longer term letting in a guest house which was carried on by way of business: the Court of Appeal disagreed in Owen v Roberts and HMRC has made no changes since and has accepted the decision (and see CG64713). It was originally part of the Condoc on PRR that s 223B should be excluded where the letting was by way of trade or business (obviously with a view to overturning Owen v Roberts) but that did not appear in the Act. The words construed in Owen v Roberts were “letting as residential occupation”, and what was required was “letting” (which could be under a lease or a licence) and that the accommodation was residential and not say commercial.

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Replying to richard thomas:
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By whitevanman
19th Sep 2020 14:18

Generally speaking, I agree with both you and TD. I don't think there is any material difference between you (or I).
I have avoided the main discussion not least because of the thing you mention in your latest post, that there are a number of important terms that have not been clearly defined. This means there are a number of possibilities one can speculate on (at length).
Take for example the position re lodger(s).
SP14 recognises that taking in a lodger does not mean that the homeowner ceases to "occupy" the (parts of the) property. But why should it be different if there are 2 or more lodgers?
Like you I don't think it is any different in so far as "occupation" is concerned. So what might be the reason for HMRC's apparent position?
S223(1) includes reference to a part of a dwelling house. That could cover the let rooms and it talks of being the owners OMR. This of course is not the same as "occupied". So, is it possible that the parts let to lodgers are not the homeowners OMR (despite the owner being regarded as still "occupying" them)? Very strange!
I can see nothing else in S222 or S223 that could apply so we are left to look at S224.
Again it is difficult.
S224(1) applies where part(s) of the dwelling has (have) been "used" for the purposes of a business etc but only where it has been exclusively so used. Can it be said that the homeowner remains in occupation of the bedroom (say) but that it is exclusively used for a letting business? Possible.
S224(2) refers to changes in what is "occupied" as the individual's residence.
HMRC apparently accept that the homeowner remains in occupation throughout so can this subsection apply? Is there / can there be, a difference between the homeowner remaining in "occupation" of the whole and yet not occupying Part(s) as his residence?

It seems to me that only S224(1) could realistically apply and the inference therefore is that, in the view of HMRC, letting to more than 1 lodger is likely to amount to a business, in which case all let rooms will be caught and relief restricted accordingly (with the possibility that lettings relief will then be due).

These are only some of the issues that this particular bit of legislation raises. Ultimately, only the courts will be able to answer the questions, which will depend on the specific facts of each case.

An interesting topic but one that could consume a lot of time and without any clear answer.

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By ChrisKM
21st Sep 2020 18:09

Thanks again to everyone who has responded.

For simplicity, I have decided to ignore SP 14/80 as the gains attributable to both the room and the annex do not exceed the limits within s223B (because the property is owned jointly). I do think that SP14/80 should apply though to the single bedroom lodger but have decided to keep it simple.

It looks like the 30-day reporting of this gain is therefore not required in this case as there is no gain to report.

On a side note, what would happen if no 30-day return were filed due to no CGT being calculated as due, the SA tax return is filed in Jan 2022 for 2020/21 with CGT calcs enclosed, HMRC dispute calcs and deem CGT is payable. Would that trigger late filing penalties of the 30-day report that should have therefore been made more than a year previously?

Or is there no answer to that one yet?

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Replying to ChrisKM:
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By richard thomas
23rd Sep 2020 09:59

Your question is interesting, and I will attempt an answer by reference to the law as set out in Schedule 2 FA 2019 and in TMA. (I don’t know who you were referring to in your last sentence, HMRC?)

If you have taken the (in my view reasonable) view that, on the facts as you have told us, relief under section 222 and 223A is available in relation to the entire gain, then I agree that your client is not liable to make a return under Schedule 2. This is the result of paragraphs 3(3)(a) and 4. For the avoidance of doubt you would not be taking advantage of either paragraph 14 or 15.

If the client decides to complete their return by showing the disposal and that the gain is nil because of lettings relief, HMRC enquire into the return and issue a closure notice on the basis that lettings relief is not due, or not as much as claimed, and the client agrees, then there is the potential for HMRC to issue a penalty assessment under Schedule 55 FA 2009 for a failure to make the Schedule 2 return by the filing date (30 days after completion) – see paragraph 29 Schedule 2. These penalties are £100 (paragraph 3) and if as seems likely in the scenario posited the return was 6 months and then a year late, penalties of a minimum of £300 on both occasions under paragraphs 5 and 6. Fortunately no daily penalties under paragraph 4 will be due.

Penalties under Schedule 56 FA 2009 for failure to pay the CGT will also be due. In this case the penalty dates will be 2 March and 2 August 2022 and 2 February 2023 and are equal to 5% of the tax unpaid. Interest will also run on the late paid tax.

Reasonable excuse and special circumstances are open to the client to argue in both cases.

However the client is under no obligation to include anything in their return, other than a statement that their chargeable gains do not exceed the annual exempt amount, the total value of the consideration for all chargeable disposal does not exceed 4 times that amount and that they are not a remittance basis individual. This is s 8C TMA. If the position is taken that PRR and lettings relief applies to wipe out the gain then there is neither a "chargeable gain" nor a "chargeable disposal". This only applies to the client of course if there are no chargeable gains or chargeable disposals above the limits on other assets.

Item 7 on page TRG 4 of the Tax Return guide sets this out and that you do not have to complete the CG summary pages (SA 108) unless the limits are exceeded. The Guide does not tell you where to put the statement that s 8C(1)(a) to (c) TMA applies, so I suggest the white space box.

The notes to SA 108 at page CGN 1 also repeat what is said at item 7 TRG 4. What is more they reverse it at the top of the second column and say positively that if your only gain is on “your main home” you do not need to complete the pages “if you qualify for Private Residence Relief on the full amount of the gain”. Arguably this does not include lettings relief but s 8C TMA still applies whether the gain is not a chargeable gain because of PRR or lettings relief.

By making the s 8C TMA declaration in the white space you are opening up the possibility of an enquiry because it is something “contained in the return” (s 9A(4)(a) TMA). If you omit the s 8C declaration entirely, then arguably the return is incorrect, but will be in accordance with HMRC’s Guidance Notes. HMRC would in my view struggle to justify a discovery assessment and a fortiori penalties under Schedule 24 FA 2007.

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Replying to richard thomas:
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By ChrisKM
23rd Sep 2020 13:36

Hi Richard

Thank you again for this comprehensive answer.

Firstly, my last sentence above was referring to HMRC; I assume it is not possible to know what they will do with questions like this yet?

Based on everyone’s help in this thread, I am quite comfortable that no CGT is payable, but hate having to tell the client that on the basis that this disposal will only be disclosed in the 20/21 return, there is still quite a period to run before HMRC cannot enquire any further.

For certainty, I wanted to file the 30-day return anyway (at least then a return has been filed) but as this is now late, I am assuming that late payment penalties are still charged for the 30-day return even if no CGT is payable?

In other words, just stick with not filing a 30-day return and include in 20/21 return as required?

Thanks as ever.

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Replying to ChrisKM:
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By richard thomas
23rd Sep 2020 16:33

I am sure HMRC will be developing a compliance strategy and algorithm for dealing with 20/21 returns where they find a UK residential property gain with tax to pay but no Sch 2 return. But that is not your situation. Yours is a case where there is no tax to pay or even any chargeable [that's the important word] gain to return, and you are concerned that HMRC may start an enquiry and disagree that no return was required. But what's the worry if you are confident that you are right about PRR and lettings relief?

I am afraid that, never having been in a position where I have had clients, I do not understand your fear about telling your client what the position is. What's the difference between this scenario and any case where a return is filed with no gain on an only or main residence? HMRC will have a year or so to enquire, as they do with any return.

The more I think about it the more I consider that you need not mention anything about the disposal on the return, as HMRC have not provided any place on the return to give the s 8C TMA declaration nor do they want to know about the gain on SA 108 because they don't want an SA 108 in this scenario.

As to making a late Sch 2 return, the problem is that there is no legal requirement to make it, because there is no tax to pay. The 90 day return is a way of ensuring that CGT that is due is paid early. It differs from the NRCGT return which is required whether there is a gain or not or tax to pay or not.

Even if you filed a nil to pay return (which is a contradiction in terms) there cannot be a late payment penalty as the penalty would be 5% of nil. There might be a late return penalty but you could contest that on the basis that what you sent in was not a Sch 2 return, only a purported voluntary one. HMRC would be right to be perplexed by that action and may suspect you were doing it to hide something from them.

I am not going to advise you what to do, but only about your legal obligations. You ae not obliged to file a 30-day return or include anything in the 20/21 return except if you wish to a s 8C declaration in the white space on the main return. You do not have to complete the CG pages (SA 108).

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