Private Residence Relief: Chargeable Gain Reduced Due To Larger Permitted Area

Summary

The appellants’ chargeable gain on the disposal of their CGT Private Residence Relief was reduced due to a larger ‘permitted area’, but a part of the gain also arose due to ownership seven years before occupation.

Background

The appellants (husband and wife) bought land for £11,000 in July 1987. At that time, the only buildings on the land were a large shed (which the husband used for storage, etc.) and a small ‘potting’ building. The total area of the site was between 0.65 and 0.70 hectares. The construction of a house commenced in 1992 and the appellants first occupied it in January 1995. In June 2006, property developers offered £2 million for the whole of the land. The appellants accepted and the transaction was completed in January 2007.

The appellants operated a takeaway in partnership. In May 2010, HM Revenue and Customs (HMRC) opened an inquiry into the partnership’s tax return for 2006/07, regarding the source capital introduced into the business of just over £2 million. Subsequently, in January 2013, HMRC issued ‘discovery letters’ to the appellants in relation to their tax returns for 2006/07, as HMRC believed that potential gains had arisen on the disposal of the appellants’ residence, which had not been mentioned in their tax returns and Capital Gains Tax was due.

On 12 March 2013, HMRC issued ‘discovery’ assessments (under TMA 1970, s 29) to the appellants, based on estimated chargeable gains and the district valuer’s view of the permitted area (for the purposes of TCGA 1992, s 222). On 27 March 2013, HMRC issued additional discovery assessments, which estimated further chargeable gains following a review of the case that brought to HMRC’s attention the long pre-occupation period. The appellants appealed against the discovery assessments.

The First-tier Tribunal (FTT) had to consider a substantive issue and a procedural issue. The substantive issue was whether the appellants had made a chargeable gain on the sale of their house, other buildings and land, which turned on the application of the private residence relief legislation. The procedural issue was whether HMRC was entitled to assess the appellants to recover the capital gains tax is considered to be due, as the discovery assessments were made more than four years but less than six years from the end of the tax year 2006/07.

Decision

On the substantive issue, the ITT considered relevant case law and held (among other things) that the shed was part of the dwelling house. In addition, the FTT found on the facts and evidence that the total area of land was 0.699 hectare and that the excess over the permitted area was one-seventh of the total.
The FTT also considered the apportionment of the gain to the period before occupation. HMRC argued that as the house only became the appellants’ residence from January 2007, the period from acquisition of the land to that time was not covered by private residence relief, as the address was not their residence in that period. The FTT rejected the appellants’ argument that as the shed was part of the residence in 1987 to 1995, none of the gain (subject to the permitted area point) was a chargeable gain. The FTT held that {before taking into account the permitted area issue) a gain arose (having applied TCGA 1992, s 224(2)).

On the procedural issue, the FTT concluded that the appellant did not fail to take reasonable care to avoid bringing about the tax loss, but that careless conduct of the appellants’ accountant and a tax adviser brought about the loss of tax. The discovery assessments were therefore made within the time allowed by TMA 1970, s 36(1).

However, the FTT held that the first discovery assessments had not been made to the best of HMRC’s judgment. The FTT, therefore, reduced those assessments to nil. The FTT held that the second discovery assessments were made to make good a loss of tax that had not been assessed, but the tax charged in them should be reduced. The appeals were therefore allowed in part.

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