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14 February 2001
Replies to Queries – 1
Help from the family
My client has two residences and a capital gains tax main residence has been in force in respect of both properties at different times.
Help from the family
My client has two residences and a capital gains tax main residence has been in force in respect of both properties at different times.
Replies to Queries – 1
Help from the family
My client has two residences and a capital gains tax main residence has been in force in respect of both properties at different times.
Section 223(4), Taxation of Chargeable Gains Act 1992 enables further capital gains exemption to be claimed where a property has been wholly or partly let as residential accommodation. This additional relief appears to be curiously short of restrictions and it does not seem to matter who the lessee is, whether a market rent is paid or not, or indeed whether the lessee actually moves in or not.
The last three years of ownership of an erstwhile main residence is exempt in any event, but before that time do readers consider that the ultimate capital gains relief for the property could be improved by an uncommercial letting to a family member?
(Query T15,752) – Dad's bright idea.
No timing restrictions affect section 223(4), Taxation of Chargeable Gains Act 1992. It is merely sufficient that the property has, separately, at some time been both a principal private residence and let as residential property. Accordingly there is no reason why the residential let cannot be either before or within the last three years of ownership. The relief under section 223(2), Taxation of Chargeable Gains Act 1992 treats the last three years of ownership as though they were eligible for principal private residence exemption. The relief under section 223(4) provides an additional exemption, subject to an upper limit of £40,000, equivalent to the gain subject to the principal private residence exemption. They are neither mutually exclusive nor dependent; each is available provided the separate requirements of the two sections are satisfied. As 'Dad's bright idea' indicates, section 223(4) is remarkably free of restriction.
In this instance it is suggested family members should be used to create a residential let to ensure entitlement to section 223(4), Taxation of Chargeable Gains Act 1992 relief. As with all arrangements involving family members, all matters need to be documented, and dealt with in the same way, as would be the case if the letting were to an independent third party. There must be payment of rent (which is actually paid), a formal assured shorthold tenancy agreement, and the rent returned under self assessment. I would have some concern if the property was never occupied by the supposed tenant, particularly if he already has a property of his own, or perhaps even more provocatively, continues to live at home. The Revenue could argue that the arrangements be ignored under the Furniss/Ramsay doctrine, or that they are a sham. There have been a number of recent instances where this stance has been taken, see for example Hitch & Others v Stone [1999] STC 431. As a minimum, the parties must comply with the stated terms of any agreement to avoid accusation that the arrangement is a sham. Having said that, what does the client stand to lose? Provided the paperwork is properly prepared, there seems no reason why the arrangements should not be put in place. If there were concern that the matter would be challenged by the Revenue, then tax should be paid on the basis that no section 223(4) relief is available, to avoid late payment surcharges or interest, and reclaim the tax once the self-assessment enquiry window has shut. – Flipper.
Because of section 223(2), Taxation of Chargeable Gains Act 1992, it is quite true as suggested that part of any letting, uncommercial or not, would have to fall outside the last 36 months of ownership, in order that the extra relief were not to be gobbled up by the private residence exemption. It should be remembered that this additional relief is restricted to the lesser of the private residence exemption and £40,000, and this factor should not be forgotten when doing any forward calculations; although of course it also depends on the future state of the property market.
It may well turn out that 'Dad's bright idea' might turn out to be a 'damp squib', by perhaps alerting the powers that be to proposing a withdrawal of this seemingly generous exemption. Nevertheless while the going is good I would recommend 'Dad's bright idea' to suggest to his client to opt for the course of action suggested; hoping that either the client, 'Dad's bright idea', or both of them are able to bear the next three years wait! – NK.
Extract from reply by 'M.C.N.':
Of course, the relief does no more than cancel the gain chargeable under section 224, Taxation of Chargeable Gains Act 1992 in consequence of the letting. However, strong exception is taken to the suggestion by 'Dad's bright idea' that the lessee need not be physically present. As regards identity, a relative or friend would have an overriding justification for his presence based on hospitality, preventing any supposed contract of letting, however dressed up.
Editorial note. Not all readers were agreed about this query, and some suggested the idea would not work. 'Flipper' would allow the section 223(4) relief even if the letting were in the last three years of ownership, but this seems optimistic as the subsection gives relief against the gain which would otherwise be chargeable by reason of the letting.
'Dad's bright idea' would in fact appear to work but remember that not much will be achieved by a short letting as the additional relief is based on a time apportionment formula.
Help from the family
My client has two residences and a capital gains tax main residence has been in force in respect of both properties at different times.
Section 223(4), Taxation of Chargeable Gains Act 1992 enables further capital gains exemption to be claimed where a property has been wholly or partly let as residential accommodation. This additional relief appears to be curiously short of restrictions and it does not seem to matter who the lessee is, whether a market rent is paid or not, or indeed whether the lessee actually moves in or not.
The last three years of ownership of an erstwhile main residence is exempt in any event, but before that time do readers consider that the ultimate capital gains relief for the property could be improved by an uncommercial letting to a family member?
(Query T15,752) – Dad's bright idea.
No timing restrictions affect section 223(4), Taxation of Chargeable Gains Act 1992. It is merely sufficient that the property has, separately, at some time been both a principal private residence and let as residential property. Accordingly there is no reason why the residential let cannot be either before or within the last three years of ownership. The relief under section 223(2), Taxation of Chargeable Gains Act 1992 treats the last three years of ownership as though they were eligible for principal private residence exemption. The relief under section 223(4) provides an additional exemption, subject to an upper limit of £40,000, equivalent to the gain subject to the principal private residence exemption. They are neither mutually exclusive nor dependent; each is available provided the separate requirements of the two sections are satisfied. As 'Dad's bright idea' indicates, section 223(4) is remarkably free of restriction.
In this instance it is suggested family members should be used to create a residential let to ensure entitlement to section 223(4), Taxation of Chargeable Gains Act 1992 relief. As with all arrangements involving family members, all matters need to be documented, and dealt with in the same way, as would be the case if the letting were to an independent third party. There must be payment of rent (which is actually paid), a formal assured shorthold tenancy agreement, and the rent returned under self assessment. I would have some concern if the property was never occupied by the supposed tenant, particularly if he already has a property of his own, or perhaps even more provocatively, continues to live at home. The Revenue could argue that the arrangements be ignored under the Furniss/Ramsay doctrine, or that they are a sham. There have been a number of recent instances where this stance has been taken, see for example Hitch & Others v Stone [1999] STC 431. As a minimum, the parties must comply with the stated terms of any agreement to avoid accusation that the arrangement is a sham. Having said that, what does the client stand to lose? Provided the paperwork is properly prepared, there seems no reason why the arrangements should not be put in place. If there were concern that the matter would be challenged by the Revenue, then tax should be paid on the basis that no section 223(4) relief is available, to avoid late payment surcharges or interest, and reclaim the tax once the self-assessment enquiry window has shut. – Flipper.
Because of section 223(2), Taxation of Chargeable Gains Act 1992, it is quite true as suggested that part of any letting, uncommercial or not, would have to fall outside the last 36 months of ownership, in order that the extra relief were not to be gobbled up by the private residence exemption. It should be remembered that this additional relief is restricted to the lesser of the private residence exemption and £40,000, and this factor should not be forgotten when doing any forward calculations; although of course it also depends on the future state of the property market.
It may well turn out that 'Dad's bright idea' might turn out to be a 'damp squib', by perhaps alerting the powers that be to proposing a withdrawal of this seemingly generous exemption. Nevertheless while the going is good I would recommend 'Dad's bright idea' to suggest to his client to opt for the course of action suggested; hoping that either the client, 'Dad's bright idea', or both of them are able to bear the next three years wait! – NK.
Extract from reply by 'M.C.N.':
Of course, the relief does no more than cancel the gain chargeable under section 224, Taxation of Chargeable Gains Act 1992 in consequence of the letting. However, strong exception is taken to the suggestion by 'Dad's bright idea' that the lessee need not be physically present. As regards identity, a relative or friend would have an overriding justification for his presence based on hospitality, preventing any supposed contract of letting, however dressed up.
Editorial note. Not all readers were agreed about this query, and some suggested the idea would not work. 'Flipper' would allow the section 223(4) relief even if the letting were in the last three years of ownership, but this seems optimistic as the subsection gives relief against the gain which would otherwise be chargeable by reason of the letting.
'Dad's bright idea' would in fact appear to work but remember that not much will be achieved by a short letting as the additional relief is based on a time apportionment formula.
