Lindsey Wicks examines a recent First-tier Tribunal decision in which private residence relief was restricted.
In William & Anor v Revenue and Customs [2017] UKFTT 449 (TC), Mr and Mrs Ritchie did not have their house on the market, but they received a windfall when property developers knocked on their door one evening and offered them £2 million for their house and grounds. The developers wanted to develop the farmland beyond for housing, and needed the Ritchie’s property for access.
Mr and Mrs Ritchie had two problems, though, when it came to securing capital gains tax private residence relief. First, they had purchased the site as a plot with just a couple of sheds, and it took them over seven years to build their house and occupy it as their residence. Second, the site was around 0.7 hectares. This is larger than the 0.5 of a hectare default ‘permitted area’ allowed for in the private residence relief legislation, and they would therefore need to prove that a larger area was required for the reasonable enjoyment of the property.
Permitted area
Much of the case concerned whether a large shed that was some 85 metres from the main house and used to store work tools, bulky household items, and ploughs, formed part of the dwelling house. The tribunal concluded that it did (see William & Anor v Revenue and Customs [2017] UKFTT 449 (TC)). The tribunal then decided that land to the rear and sides of the large shed, estimated to be around 0.1 hectares, was not within the permitted area and therefore did not qualify for private residence relief. This equated to around one-seventh of the area. Therefore, although the tribunal allowed the permitted area to be more than 0.5 of a hectare, it decided that the permitted area was still less than the full size of the plot.
Period before occupation
The Ritchies had owned the property for less than twenty years. Given that it took them over seven years to build and occupy the house on the site, a time-apportioned gain (as in Henke v HMRC [2006] SpC 550) would have meant that a large proportion of the gain would not have qualified for private residence relief.
The tribunal was not comfortable with a time-apportioned approach as the property had been given a rateable value of £200,000 after construction, so any gain for the period prior to occupation was small given the cost of the land of £11,000 and construction costs of £179,900. The tribunal looked to the private residence relief legislation at TCGA 1992, s 224(2), which allows for a just and reasonable adjustment where, ‘at any time in the period of ownership there is a change in what is occupied as the individual’s residence, whether on account of a reconstruction or conversion of a building or for any other reason’. The tribunal considered that the wording ‘any other reason’ was not restricted, although if the general wording was restricted to things of the same type as the listed items (the eiusdem generis rule), the circumstances in this case were similar enough to the specific reasons stated in the legislation. The tribunal therefore concluded that the gain for the period of non-occupation was £9,100.
Practical Tip:
This decision highlights that it is not always the case that the sale of a person’s home will qualify for private residence relief and escape capital gains tax. There can be numerous reasons why full relief will not be available (this case concerned just two), and it is important for taxpayers and their advisers to explore all qualifying criteria. Part of the reason this case ended up before the tribunal was that the advisers had failed to address the period of non-occupation.
