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Private Residence Tax Relief

Private Residence Tax Relief

In 2011 clients bought a plot of land of just under an acre with planning permission to build one house on it. The intention was always to live in this house as the sole residence for the longer term.

The clients sold their previous house to finance the purchase of the land and moved into rented accommodation very close to the building plot.

They then found that they couldn't get a mortgage to build the house as originally planned, so went back to the drawing board, applied and got planning permission to build two houses, one on a plot covering 2/3rd of the land and the other on 1/3rd of the land.

They got the planning permission for this and the mortgage to build one smaller house, built it and moved in December 2014. This was on the 1/3rd of the land plot.

No footings or anything were put in on the second house and the second plot wasn't fenced off, it was just rough lawn along with the rest of the grounds. Services are to the plot though, as they were put in for the existing house and the planned house at the same time.

During 2015 they lived in the house, used all the land and their children played on all the land as garden.

Early 2016 they sold the second plot as land with planning permission and at that stage it was fenced off.

Do you agree (or disagree) that it is perfectly reasonable to treat this as a sale of part of the garden of a house with under 5000 square metres of grounds and not subject to Capital Gains Tax?

I add that the clients' business is not building or construction related.

Looking here and here I don't see why this can't be the case.

If you agree that it is a sale of part of the private residence, is it prudent to put a note to the Tax Returns explaining the sale and treatment, or does that just indicate some doubt?!

Thanks

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By Ruddles
02nd Mar 2016 15:24

I disagree

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03rd Mar 2016 09:54

How convenient!

If I were HMRC, I'd ask for copies of all correspondence[with lawyers, planning consultants, architects, mortgage brokers etc.] from when clients first purchased plot.

 

 16.02 

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02nd Mar 2016 15:36

I also disagree

The intention was always clearly to build two houses ergo PPR relief is not available.

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By newmoon
02nd Mar 2016 15:40

But ...

The intention at the beginning and when the land was purchased is stated as being to build one house and live in it. That is what would have happened if the mortgage finance had been available to achieve this aim. 

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02nd Mar 2016 15:42

intentions

The intention to build two properties seems to pre-date the act of one of them being their home.

But certainly a bit of a puzzler. 

Edited to add: typed at the same time as the 3 above, I am clearly slow today.

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By newmoon
02nd Mar 2016 15:54

I agree with you

I agree that the change of plan was before it was a private residence but it was also after the land was bought. This was the main reason for my question.

I have had a case with HMRC previously where a client with a rental property portfolio bought a bungalow in poor condition, with the intention of renovating it and renting it out as part of the portfolio. The client had never previously sold a property from the portfolio.

During the renovation period someone asked if they could buy it as it was ideal for someone with a physical disability, so the client sold it.

HMRC agreed that this wasn't a trading venture but a capital gain, because of the original intention to rent out.

The original intention in the case of this post was that it would be the private residence.

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02nd Mar 2016 16:22

Reread your own sentence

newmoon wrote:
I agree that the change of plan was before it was a private residence but it was also after the land was bought.
The intention to build the second house arose before the first house became a private residence. Therefore the plot for the second house was never part of that private residence. It doesn't matter what the plan when he bought the land was, because the land wasn't occupied as a private residence at that point.

It is not accepting this fundamental flaw that is giving the appearance that you aren't really after advice.

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By Ruddles
02nd Mar 2016 15:46

Clues

'The "intention" at the "beginning"'

'That is what "would have" happened' - but it didn't.

Is this another case of a poster seeking an endorsement of their proposal and refusing to accept advice to the contrary?

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By newmoon
02nd Mar 2016 16:07

Where have I refused to accept advice?

Is this another case of a poster seeking an endorsement of their proposal and refusing to accept advice to the contrary?

I'm not clear where I have refused to accept advice to the contrary.

I expect Accountingweb to be a sounding board and I accept there will likely be differing views, or even a unanimous view opposed to what I hope.

My intention is to try and achieve the best result for my clients and one that is within both the letter and the spirit of the legislation.

 

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02nd Mar 2016 15:49

They were always building two houses, you stated there was a plan for the second house before they moved in to the first one. There was never an intention, from the date the house became their PPR, for their PPR to include the whole plot, it was always going to be another house.

What they might have wished before they built their first house is irrelevant.

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02nd Mar 2016 16:04

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@new moon, I think the difference with the old case is the trade was "underway" when something changed.  That is to say the intention was not fulfilled.

 In the current case, the intentions changed well before the property was the PPR, so you seem to have a weak case based on the facts presented.

Had it been the facts that they built a house on a large plot, THEN got planning and sold on part of plot then they would have a strong case.  The fact the planning was in place from day one and they put in services gives HMRC some good evidence about the intentions being to build two properties way before either of them was their home. 

So I think they are stuffed myself, albeit you just never know how our friends at HMRC might view it, even assuming they look at it.

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By newmoon
02nd Mar 2016 16:20

Thanks you.

ireallyshouldknowthisbut wrote:

@new moon, I think the difference with the old case is the trade was "underway" when something changed.  That is to say the intention was not fulfilled.

 In the current case, the intentions changed well before the property was the PPR, so you seem to have a weak case based on the facts presented.

Had it been the facts that they built a house on a large plot, THEN got planning and sold on part of plot then they would have a strong case.  The fact the planning was in place from day one and they put in services gives HMRC some good evidence about the intentions being to build two properties way before either of them was their home. 

So I think they are stuffed myself, albeit you just never know how our friends at HMRC might view it, even assuming they look at it.

Thank you. You have replied with a logical argument and I agree. It was the part about when the plans changed that gave rise to the question and doubt in my mind.

There isn't a way to present this to HMRC in advance, is there (it's not a valuation and even if it was that's stopping 31st March I think)?

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By Ruddles
02nd Mar 2016 16:14

Well why do you keep challenging the same answer that various respondents have given?

 

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By newmoon
02nd Mar 2016 16:26

There was no reason given

In reply to Ruddles:

Your initial response was just 'I disagree' with no reason why you disagree.

The second respondent didn't actually give an opinion, but said that if he/she were HMRC they would ask for more information.

The third response misunderstood that it 'was always the intention' which it wasn't.

That's when I posted again to clarify!

 

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02nd Mar 2016 16:18

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@Ruddles, I think its a perfectly reasonable question myself and worth exploring the OP's understanding on.  

I would be quite interested if someone had a  different opinion to the current respondents.

 

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By Ruddles
02nd Mar 2016 16:30

It's a perfectly reasonable question

More than one respondent has given the answer. I too would be interested if someone had a different view - but I suspect that we may have to wait some time.

My opinion is that the analysis is straightforward. They purchased a plot of land on which they originally intended to build a single (main) residence. Before they did anything, they changed that intention to build a second property on part of the land (presumably to either sell on or hold as an investment - if the former then I have absolutely no doubt that they'd be stuffed). The intention to enjoy or occupy that land as a garden of the first property therefore ceased at that time.

I'm not saying that the OP shouldn't treat the land as qualifying for PPR, I'm simply saying that, IMO, it is not perfectly reasonable to do so.

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02nd Mar 2016 17:19

I too disagree. 1/3rd of the land was appropriated to trading stock immediately following the return to the drawing board, and your clients are very bad people for allowing their children to play on a building site.

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02nd Mar 2016 18:59

Gain or not

I have a case where a family purchsed a house to live in that had an detached annex with planning permission for a 4 bed house in the garden. They did not buy it with the intention of development. They needed a large place as they had seven children. The owner then used the annex as an amatuer  music studio for him and his kids. It was getting in a bad state of decay so he thought he would re build it himself following the plans that already had approval. After about five years he gave up finishing the house build and just used it as a bigger music studio for his family ( the kids were drummers, guitarists who made terrible noises and had three bands between them). They then had a fire in the main house, started by the kids smoking one night,  with 30 firemen attending on the fire night.The firemen cut off the utilities and deemed it unhabitable.The family had to move into the unfinished extra house and finished it off quickly so as to be building regs compliant.  They then after lots of extra work over about a year they got the main house back to habitable. The wife and children then moved back to the main house but the husband stayed in the garden house as he liked the piece and quiet from  nosey teenagers and their multitude of friends. He lived in it for five years. The children (bar the youngest) eventually moved out of the main house so he moved back in with his wife, fenced off the house he had lived in and sold it as it was now surplus as the kids had gone. Is this a sale of part of the main residence or should it be capital gains? (it was all in grounds under an acre).

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02nd Mar 2016 22:18

And this should be a new question

tax novice wrote:

I have a case where a family purchsed a house to live in that had an detached annex with planning permission for a 4 bed house in the garden. They did not buy it with the intention of development. They needed a large place as they had seven children. The owner then used the annex as an amatuer  music studio for him and his kids. It was getting in a bad state of decay so he thought he would re build it himself following the plans that already had approval. After about five years he gave up finishing the house build and just used it as a bigger music studio for his family ( the kids were drummers, guitarists who made terrible noises and had three bands between them). They then had a fire in the main house, started by the kids smoking one night,  with 30 firemen attending on the fire night.The firemen cut off the utilities and deemed it unhabitable.The family had to move into the unfinished extra house and finished it off quickly so as to be building regs compliant.  They then after lots of extra work over about a year they got the main house back to habitable. The wife and children then moved back to the main house but the husband stayed in the garden house as he liked the piece and quiet from  nosey teenagers and their multitude of friends. He lived in it for five years. The children (bar the youngest) eventually moved out of the main house so he moved back in with his wife, fenced off the house he had lived in and sold it as it was now surplus as the kids had gone. Is this a sale of part of the main residence or should it be capital gains? (it was all in grounds under an acre).

... perhaps with some formatting ;)
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03rd Mar 2016 09:55

Additional point. How long between the purchase of the land and occupation. If more than 12 months, query that PPR relief is available anyhow.

 

 

HMRC help sheet 283 says:-

If for up to a period of 12 months you do not occupy your new home when you acquire it because you are not able to sell your old home, or you need to carry out refurbishment, you can treat up to the first 12 months as if the house had been your only or main residence in that period. In exceptional circumstances, we may allow you to treat a longer period (up to a total of two years) in the same way. The same treatment applies when you buy land to build a house on.

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03rd Mar 2016 10:00

CGT and intentions

I think people are reading a bit too much into this issue of intention.  If a person owns a plot of land there is nothing to stop them applying for planning permission and it has no effect whatsoever from a CGT perspective, it is not an acquisition, it is not a disposal, it is an enhancement of the existing asset.

So whether this intention or change of intention was before or after the construction of the house or not does not affect the basic calculation of any gain arising on disposal and the relief available for a PPPR can only arise when a gain occurs - "This section applies to a gain accruing etc".  The gain occured when plot number two was sold and it was only physically separated at that time.  Whether that land was or was not occupied is not affected by any intention as it is clear that it was occupied in fact and not physically separated.  Bear in mind that occupation is a legal right which belongs to the owner and enjoyment is the use of that legal right - there clearly was both, but we are told that the land is within the permitted area of 0.5 of a hectare.  This satisfies the conditions in s222(1) (a), the dwelling house and s222(1)(b) land which he has for his own occupation and enjoyment as its garden or grounds up to the permitted area.

The disposal is a part disposal of an asset which satisfies the condition laid down in law and this is confirmed by revenue CGT manual CG64815 "So where the area of garden and grounds, inclusive of the site of the dwelling house, does not exceed 0.5 hectares, relief is automatically available for the whole area."  It would be different where part of the land was occupied for the purpose of a trade, it would be excluded by s224(1) - but that doesn't apply as there is no trade.

Could you argue that s224(2) or (3) applies? (2) occurs where there is a change in what IS occupied - until the land was physically separated there was no change, there may have been an intention but the was no change in what IS occupied or changes in use - again there was no change in use until the plot was physically divided.  S224(3) applies where the acquisition was made wholly or partly for the purpose of realising a gain from the disposal of it.  When the land was acquired we are told that the intention was to occupy the whole as the main residence and that at that time there was planning permission for only ONE residence.  Subsequently there was an application to allow for a second residence to be built on the property but that this was never carried out by the owner who sold the separate plot with the benefit of planning permission.  Could you argue that part of the gain was attributable to this expenditure (obtaining planning permission) wholly or partly for the purpose of realising a gain from this disposal.  This is the only potentially weak area of course but just because you seek planning permission there is nothing to stop two buildings on the same plot of land being enjoyed as a single residence. (incidentally this is also the answer to the second query that tax novice posed.  If the act of obtaining planning permission caused s224(3) to apply in every case then Varty v Lines, where the building plot was retained after the disposal of the main residence, would have been decided on completely different grounds.

In conclusion is it perfectly reasonable to treat this gain as exempt - the answer is, IMHO yes, however should you put a note in the white box section - again the answer is yes because has been sold is not the dwelling house but the grounds within the permitted area.  Ruddles, for one, may disagree but no where is this disagreement phrased in terms of the legislation that applies and, of course, if the land was a building plot as Portia suggests, then the owner was a naughty boy in allowing children to play on it...

 

 

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By newmoon
07th Mar 2016 09:04

Paul - thank you and your comprehensive reply is very much appreciated. 

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03rd Mar 2016 12:43

Private Residence Tax Relief -Main residence+plot of land

For future reference

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03rd Mar 2016 16:05

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Paul, I enjoyed reading through your contribution. Certainly some food for thought there.

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