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Castles under siege: HMRC and PRR

HMRC’s vigorous approach to Private Residence Relief claims is keeping the tax tribunals busy, says Neil Tipping. 

Everyone is aware that one of the most generous reliefs available, at a time when the Government is constantly seeking ways to increase the tax take, is Capital Gains Tax Private Residence Relief (PRR). All you need to do is live in a property. You don’t even have to live in it for the whole period of your ownership, and when you come to sell it, subject to a number of conditions, you don’t have to pay capital gains tax on the increase in value from when you bought it. And this normally applies whether the gain is £100 or £100 million.

Unfortunately, HMRC appears to be waking up to the fact that this is a relief that is potentially open to abuse and the number of HMRC enquiries into the sale of property where Private Residence relief is being claimed has increased substantially. While we do not have actual figures of cases opened, our own experience indicates that we have seen more contentious Private Residence Relief cases in the last two years than we have seen during the previous 15 years.

Accordingly, we thought it might be a good idea to highlight the areas where HMRC is challenging clients and to highlight upcoming changes to the relief.

Too much land

The legislation gives you a generous half a hectare (1.235 acres) where HMRC will not question the usage of the garden, but if you exceed that, you may need to apportion the cost. Of course, if you live in a (say) 10-bedroom mansion, the legislation gives you some leeway so that they will allow relief for all of it if the land area is appropriate to the size and nature of the property. You’ll need to consider the fact that what HMRC and the Courts consider “necessary for the use and enjoyment of the property” may not agree with your client’s view as to what is necessary. In the case of Longson v Baker (HMIT) [2001] BTC 356, it is made clear that any argument on behalf of the taxpayer must be firmly rooted in the objective requirements of what is required for reasonable enjoyment of the property (as a dwelling-house) by reference to the particular property, rather than the particular owner.

Longson claimed that the disposal of just under 18.7 acres of land was exempt from CGT because it comprised, as well as a substantial dwelling-house, land required for the ‘reasonable enjoyment’ of the residence. The land included several stable blocks, providing 17 loose boxes, a garage, hay lofts and barns, one of which was used as an indoor riding facility. The District Valuer advised the inspector that just over 2.6 acres were required for the ‘reasonable enjoyment’ of the residence. In the High Court, the taxpayer lost his appeal, it being held that:

• the issue under TCGA 1992, s. 222(3) was a question of fact. The position was similar to that under the Housing Act 1936, s. 75, which, in the context of compulsory purchase orders, referred to land as being ‘otherwise required for the amenity or convenience of any house’. Those words had been held to raise a question of fact and, by analogy, so did the words of TCGA 1992, s. 222(3); and

• use of land for equestrian pursuits was not relevant to the issue of whether that land was required for the reasonable enjoyment of the dwelling-house as a residence. TCGA 1992, s. 222(3) raised an objective test. On that objective basis, there was clearly no requirement to keep horses on the land in order to reasonably enjoy the dwelling-house as a residence. If, for example, the appellant had relinquished his equestrian pursuits and had instead converted the stables to, say, garage classic cars, the requirement for use of the whole 18.7 acres of land would have disappeared.

Accordingly, the key issue to consider is not what amount of land is dictated by the interests or requirements of the householder, but what amount of land is deemed necessary for the use and enjoyment of the residence.

Unfortunately, what is deemed ‘necessary’ is a heavily subjective question as illustrated in a recent meeting where one valuation officer indicated that no property should have an allowable area of more than half a hectare. Let us hope that the Sandringham estate or Windsor Castle aren’t put on the market any time soon!

You’re a serial property developer

In recent years, HMRC has made use of some fairly strong case law when dealing with individuals who move into a property, spend 18 months renovating it, sell it then move into another property to do the same thing. Arguably, what they actually have is a trade and there would normally be no right to PRR on the properties sold. The lead case is Goodwin v Curtis [1998] BTC 176, which brings case law precedent to the view that the move to a property must be for a settled purpose – namely, is it clear that when you moved in, you had the intention of moving there permanently? From the case law, the test concerns ‘quality of occupation’ – have you moved in with your family, does your post go there, do you have furniture, is your family registered with a local doctor, etc.

HMRC’s problem is picking up these serial developers out of all of the people who might otherwise have peripatetic jobs that entail them moving house on a regular basis. There is also the issue of those people in areas where land traditionally climbs in value who move rapidly up the property ladder, living in properties for short periods – Section 224(3) Taxation of Chargeable Gains Tax Act gives HMRC the right to query the intentions of those people since the act states: “224(3) Section 223 shall not apply in relation to a gain if the acquisition of, or of the interest in, the dwelling-house or the part of a dwelling-house was made wholly or partly for the purpose of realising a gain from the disposal of it…”

A good example of when HMRC challenges a client who indicates she has moved into a property for a settled purpose was a case we dealt with involving a client who had separated from her husband. She had bought a property a few roads away so as to make sure that the children had access to both parents, renovated it, and moved in. Eight months passed and the client and her husband reconciled and she moved back to the marital home and subsequently placed the new property on the market.

She claimed private residence relief and HMRC enquired into the return. The client’s agent made representations but, ultimately, HMRC stated that they were rejecting the private residence relief claim on the basis that when she moved into the property, there was (in the Officer’s opinion) a strong possibility of reconciliation, and therefore she had not moved in to the property for a settled purpose.

After a four-hour fact-finding meeting with the client we were convinced that, contrary to HMRC’s view, when she moved into the property her primary thought was to make a home for her children and that at that point there was no thought of reconciliation. After a number of letters to HMRC pushing this view, we asked for an HMRC statutory internal review and advised that our client was prepared to go to First Tier Tribunal if HMRC did not back down.

In the event, HMRC took notice of our point that we had an eloquent and motivated client who would be happy to defend her position at tribunal, and withdrew from their position.

While we expect HMRC to have a healthy scepticism, in our view they held firm to a badly under-researched hypothesis long after they should have conceded, based on the evidence supplied. However, a point to make is that each of these cases relies heavily on detailed facts and there is no substitute for sitting down with clients to go through the exact chain of events culminating in the claim for private residence relief.

• Neil Tipping is a Senior Tax Consultant at CronerTaxwise. Part 2 of this article will appear in the Winter issue of Accounting Practice (published in December)

By Neil Tipping