Meg Saksida explains the definition of ‘ancillary dwellings’ in the context of a recent case.
Capital gains tax (CGT) principal private residence (PPR) relief gives an extremely valuable exemption for the taxpayer’s main residence. As a part of the ‘main residence’, the taxpayer can include their dwelling house and their garden and grounds.
The dwelling house itself could be a single building but could also include more than one building, for example a house with a detached garage, a pool house, a glasshouse, a granny flat or another kind of outbuilding or ancillary building.
Recently, as a result of ‘multiple dwellings relief’ for stamp duty land tax (SDLT) purposes (where SDLT is calculated not on the whole sum of the dwelling house purchased, but on the identifiable parts if there are self-contained elements of the whole main residence), the concept of when separate ancillary dwellings can make up a main residence for PPR relief has also been considered.
Looking back…
In addition to pool houses, garages, sheds and other storage rooms, an additional building can also be another dwelling house separate from the main residence.
Since the early 1990s, following several cases culminating with the case of Lewis v Lady Rook [1992] STC 171, it has been an accepted fact that a dwelling house could include more than one building, even if the additional building was a separate dwelling house. In making his decision in this case, Balcombe LJ stated that what was important was that the “[group of buildings] can be sensibly described as being a dwelling house though split up into different buildings performing different functions”.
If the ancillary residence is within the permitted area (up to half a hectare), it will be automatically included in the definition of the main residence as long as it is being used for residential purposes. If it is not in the permitted area, the additional building needs to satisfy three conditions to be considered as a part of the dwelling house. It needs to be appurtenant to, in the curtilage of and used for residential purposes by the main residence.
1. Appurtenant to the main residence
Rather than geographical proximity, appurtenance is the relationship between the two buildings. They should be seen as one and the same property, despite their separateness.
A building appurtenant to the main residence will be unequivocally a part of the residence when it is sold.
2. In the curtilage of the main residence
To be in the curtilage of something means to be in close vicinity of it. HMRC directs us to the Shorter Oxford Dictionary definition, which defines it as ‘a small courtyard or a piece of ground attached to a dwelling house and forming one enclosure with it’.
The buildings must form an integrated whole and the emphasis is on their geographical closeness or proximity. Walls, fences, rivers, tree belts and roads are all dividers which could threaten curtilage, but each case should be considered on its facts.
3. Used for residential purposes by the main residence
Sometimes it is obvious that the ancillary building is not used for the residential purposes of the main residence, for example when there is a trade being carried out inside it. However, when it is not obvious, more investigation needs to be made. Usually, if a part of the main residence is not used, PPR is not restricted.
For example, if the children grow up and no longer need their bedrooms, PPR relief will not be limited to the years they used the bedrooms. The whole of the property will be entitled to the full relief as if the whole home is being used. This point was confirmed in Green v HMRC [1982] STC 485. However, this does not extend to ancillary buildings. If a building is both appurtenant to and in the curtilage of the main dwelling house, it needs to be used for residential purposes in order to form a part of the main residence for PPR relief purposes.
Crippin v HMRC
In this recent case, the taxpayer, Mr Crippin, had a family home (Loaningdale) and an ancillary residence, which had been converted from an annexe (Scottish bothy) into a three-bedroom flat with a kitchen and bathroom (Benko). Throughout the duration of the ownership of the main residence by the taxpayer, the family had used Benko for both accommodation purposes and also as a storage area for extra household items.
Benko (but not the main residence) was disposed of in January 2013 to Mr Crippen’s partner, but the taxpayer did not declare this on his self-assessment tax return for that tax year as he thought it was exempt as a part of his main residence. HMRC opened an enquiry and argued that Benko was firstly a separate dwelling, and secondly, it had been previously commercially let out and as such, CGT was due.
On studying the facts, the First-tier Tribunal (FTT) agreed that Benko was indeed a separate dwelling, but as outlined above and previously held in Lady Rook (above), this did not prevent it from being exempt for CGT purposes if it was either inside the permitted area and used by the family or outside the permitted area, but appurtenant to and within the curtilage of the main residence. The question, therefore, was not whether it was a separate dwelling but whether it was appurtenant to and in the curtilage of the main residence and being used by the family. It was held that it was all three.
Turning to the let periods, Benko had been advertised as holiday accommodation, and during this period of holiday letting, the FTT agreed with HMRC that it was not at this time part of the taxpayer’s main residence. But as this period of lettings fell within the final 36 months (as it was then) of deemed occupation, this was not relevant to the decision.
Practical tip
For an ancillary dwelling to qualify for PPR relief, the dwelling must be used by the taxpayer or his or her family for residential purposes. This is the most important point because as long as it is in use by the main residence, if it is inside the permitted area, it will be automatically included in the definition of the main residence, even if it is not in the curtilage or appurtenant to the main residence. Outside the permitted area, it will need to also be appurtenant to and in the curtilage of the main residence, but if it has all three, irrespective of the fact it may be a separate dwelling, full PPR relief should be available on the whole building on a subsequent disposal.
