Lee Sharpe looks at a recent Scottish capital gains tax (CGT) case involving the disposal of a dwelling within the grounds of a larger main residence.
Given how many tax cases have been heard over the years regarding the relief from capital gains tax (CGT) in respect of one’s only or main residence (referred to in this article as principal private residence (PPR) relief), it may surprise some readers to find that the provisions involved cover only three principal sections and a handful of pages of the relevant legislation (TCGA 1992, ss 222-224), although there are further sections dealing with dependent relatives, divorce, etc.).
The recent case Whyte v HMRC [2021] UKFTT 0270 (TC) and the now-infamous Bunny Hall (nothing to do with rabbits) required a judgment spread over 135 pages. In stark contrast, this month’s judgment was done and dusted in just five pages. But less is not always more.
A brief history: Crippin v HMRC
The taxpayer in Crippin v HMRC [2021] UKFTT 351 (TC) acquired a quite large property in 2006, as sole legal owner, for a family home. The judge records that the property comprised a “dwelling-house and an adjacent annex[e]”. In 2010-2011, that annexe was substantially enhanced to incorporate a three-bedroom flat with a bathroom and kitchen and living area. While the flat did have separate access, it also shared a balcony with the main house. The utilities were also taken from the main house, according to the taxpayer (more on this later). The relevant planning applications were originally granted on the basis that the annexe would nevertheless be ancillary to the main house.
Initially, the annexe was used as part of the main home by the family – the taxpayer, his partner and their four children – as extra storage space and a weekend ‘retreat’ for the kids. Late in 2011, and for roughly a year, friends of the taxpayer’s partner lived in the flat on an informal basis and contributed to accommodation overheads. However, the taxpayer and his family still had access to the annexe and did, in fact, continue to use it for storage, etc.
The new occupation prompted a visit from the local council enforcement officer, which in turn prompted the taxpayer to make a retrospective planning application in 2012 for ‘independent flatted accommodation’.
While that application was progressing, the ‘tenants’ moved out and the taxpayer advertised the flat as furnished holiday accommodation (FHA) for a few months. However, the taxpayer needed to raise finance to repay bank loans to his company, so he sold the flat in January 2013 to his partner, for £200,000; this sum was in line with an independent valuation undertaken at the time, but that valuation also said that the flat had its own services – electricity, water, etc.
The taxpayer claimed that he was selling part of his property, eligible for PPR relief. HMRC disagreed.
(Note that since the taxpayer and his partner were not married, the usual CGT so-called ‘spouse exemption’ would not apply).
Dwellings in dwellings
HMRC’s argument was that the flat, once finished, was itself a dwelling-house quite separate from the taxpayer’s main home, and that the taxpayer could not have used the flat as part of his PPR because it was let to friends, or subsequently available to let (and occasionally occupied) as FHA. Furthermore – and based on the third-party valuation – the flat had its own utilities separate from the main house, pointing towards its ‘independence’.
HMRC seems to have misdirected itself here. It was established in the Court of Appeal case of Batey v Wakefield [1980] 55 TC 550 that a PPR can comprise both a main house and quite separate buildings that are themselves dwelling-houses (albeit they must have been arranged so as to serve a function or otherwise to support the main house). The judge in Crippin referred to Lewis v Rook CA 1992, 64 TC 567, which HMRC prefers because it won that time, but the case nevertheless followed similar principles.
HMRC also had to accept that the issue of whether or not the flat had its own utilities was: (a) disputed and (b) largely irrelevant.
Exclusive use?
Having established that, distinct or not, the flat or annexe was clearly ancillary to the main house and could therefore comprise part of the taxpayer’s PPR, the judge then considered whether it had been occupied by the taxpayer as (part of) his main residence. The judge decided that, given the lack of formality of the occupation by the taxpayer’s ‘friends’, and uninterrupted access, the taxpayer had occupied the annexe as (part of) a dwelling-house comprising his main residence – but not once it had been marketed as available to occupy as an FHA. Fortunately, the judge decided that the non-qualifying period was in the last few months of the taxpayer’s ownership of the flat or annexe, so it could be ignored.
I find this distinction quite curious. TCGA 1992 s 224 states that PPR relief should be restricted (only) where part of a dwelling-house is used exclusively for the purposes of a trade or business, which is something that HMRC takes to heart in its Capital Gains manual at CG64663.
As he acknowledged that the taxpayer and his family used the annexe for personal and family purposes while the property was available as FHA, but not actually so occupied, I am surprised the judge appears to have concluded that the flat was, nevertheless, used exclusively for business purposes once designated as an FHA. It would seem, for example, to contradict the approach in Owen v Elliott [1989] 63 TC 319, wherein the family running the property in question as a B&B retreated to an annexe in the high season, but reoccupied the entire house during the quiet winter months (the judge at the High Court was satisfied that the entire property could be the taxpayers’ PPR; the Court of Appeal did not dispute this point; see CG64723). Perhaps the judge was applying the rules as if the flat alone counted as the taxpayer’s PPR?
Beneficial ownership in Scotland
The judge also considered the taxpayer’s claim that the property was, in any event, also his partner’s PPR, as she had a beneficial interest, despite not having any legal title to the property, for instance, because she had paid towards the family’s costs of living at the property. It is generally accepted that CGT follows a person’s beneficial ownership of a property, and contributing to the cost(s) of an asset can count as suitable evidence. For example, at CG70230:
‘Each case must be considered in the light of its own particular facts, but the following are indicators that a person has beneficial ownership of land:
- they hold legal title (in the absence of any contrary evidence, the legal owner will normally also be the beneficial owner);
- they occupy the land;
- they receive any rental income from the land;
- they provided the funds used to purchase the land;
-
they received the sale proceeds from a disposal of the land.’
However, the judge referred to the case of Stack v Dowden [2007] UKHL 17, which considered a cohabiting couple in England, but also contemplated the position for Scottish property, as follows: “Scots property law does not distinguish between the legal and the beneficial interests inheritable property.”
The judge in this case therefore concluded that since the taxpayer’s partner held no legal interest in the property (the taxpayer had acquired it in his sole legal name), she could not hold any beneficial interest in it either. The taxpayer is lucky the judge had already found in his favour as regards whether the flat comprised part of his only or main residence.
Conclusion
While the case seems to turn on simple facts and merely re-affirm Batey v Wakefield, there are some interesting points – potentially quite concerning for couples acquiring Scottish property.
Readers who also have an eye to stamp duty land tax (or land and buildings transaction tax for Scottish property) may well appreciate the irony of HMRC’s claiming here that an adjacent annexe was, nevertheless, a separate dwelling-house for CGT and PPR purposes, when it typically argues (usually successfully) that such configurations really comprise just a single large dwelling overall, when the buyer wants to claim multiple dwellings relief.
