CGT: Relief due on sale of main home annexeby
A Scottish taxpayer sold a property adjacent to his main residence to his partner, claiming private residence relief applied to the disposal. He had to go to a tribunal to argue that the gain was exempt from capital gains tax.
In July 2006, Roger Crippin purchased a property in Scotland in his sole name for £575,000, which comprised a dwelling-house (Loaningdale) and an adjacent bothy.
Planning application was subsequently applied for, and approved, to construct the “Benko” - a three-bedroom flat with a kitchen/living area and bathroom. The construction of Benko started in 2010 and was completed by July 2011.
Access to Benko was either through a separate independent entrance or via a first-floor balcony shared with Loaningdale.
Was it let?
From October 2011, Benko was occupied by friends of Crippin’s partner (McKean), who stayed there for about a year. They made financial contributions while staying in the property, but there was no formal tenancy agreement in place. During this time, Crippin and McKean had unrestricted access to Benko and their personal items remained there. They had also used Benko a few times themselves while McKean’s friends were away, and Crippin’s parents had also stayed there during this period.
In May 2012, following a visit from a Scottish Borders Council enforcement officer, a retrospective planning application was submitted for the conversion of Benko to independent flatted accommodation.
Around October 2012, McKean’s friends left the property. At that point, Benko was advertised as available for furnished holiday lets and rented out as such to third parties for 31 days prior to Benko’s sale. When not used as holiday accommodation, Crippin and McKean used Benko for personal and family purposes.
Sale and enquiry
In October 2012 HSBC requested the repayment of a loan from a company of which Crippin was director. In order to raise the funds, McKean agreed to purchase Benko from Crippin.
In January 2013 Crippin sold Benko in its entirety to McKean at market value for £200,000.
Crippin did not report the sale in his 2012/13 tax return, as he considered Benko to be an ancillary part of the dwelling-house in which he and McKean lived with their children as their only or main residence, such that the gain was exempt under private residence relief (PRR).
In October 2014, HMRC opened an enquiry into the return, concluding that Benko had not at any time been a part of a dwelling-house that had been Crippin’s only or main residence.
HMRC issued a closure notice, amending the return to include a CGT liability of £26,978 arising on the sale of Benko. Crippin appealed to the first tier tribunal (FTT), which heard his case in September 2021 [TC08285]
Referring to the case of Lewis (Inspector of Taxes) v Rook  STC 171, a dwelling-house may consist of more than one building, even if the other building itself constitutes a separate dwelling-house.
In this appeal, the tribunal had to decide whether Benko, which was “appurtenant” to, and “within the curtilage” of Loaningdale, was a part of a dwelling-house that had been Crippin’s only or main residence at any time during the period in which he owned it.
Although the FTT did agree that Benko was a dwelling-house in its own right and separate from Loaningdale, per Rook this in itself did not prevent Benko from being regarded as part of an entity which constituted Crippin’s residence for the purposes of PRR.
There was no formal arrangement under which McKean’s friends were allowed to stay at Benko. However, the taxpayer’s possessions remained at Benko, and Crippen and McKean had unfettered access to Benko and use of it during this period. These facts together lead the FTT to consider that Benko was, from the time of its construction until the departure of McKean’s friends around October 2012, Crippin’s only or main residence.
Once Benko was marketed as a holiday let, the FTT determined that it could no longer be considered as Crippin’s main residence. However, as the FHL advertising took place within 36 months of sale (the amount of final period exemption available at that time – now 9 months) Crippin was entitled to full relief under section 223 TCGA.
The appeal was allowed.
An argument advanced by Crippin (but not ultimately relevant in deciding the appeal) was whether McKean had a beneficial interest in Benko.
Benko was held in Crippin’s sole name (there had been no formal declaration of trust) and was, as a property located in Scotland, subject to Scots property law. Under Scots law, there is no distinction between the legal and beneficial interests in heritable property. As McKean did not hold legal title to Benko, she could not have held any beneficial interest in it.