Replies to Queries -- 1 - Unusual facts

I act for a client who is about to sell his private residence and I would invite readers' suggestions as to how to arrive at the assessable profit (if any). The facts are as follows. The initial site was acquired about 20 years ago and has lain vacant and unused over most of this time. The house was actually built in 1998 and occupied on completion as the sole private residence. The house was sold in April 2001 realising a gain.

We understand the following valuations/proceeds would apply:

From the facts given it is assumed that the house was completed in the latter part of 1998 and sold after 5 April 2001. Therefore the actual period of its occupation as the client's principal private residence was less than 36 months.

However, Extra-statutory Concession D49 - Private Residence Relief: Short delay by owner occupier in taking up residence - says 'where an individual acquires land on which he has a house built, which he then uses as his main residence ... In these circumstances, the period before the individual uses the house as his only or main residence will be treated as a period which he so used it for the purposes of sections 223(1) and 223(2)(a), Taxation of Chargeable Gains Act 1992, provided that this period is not more than one year ...'. Therefore, based on the information given, the period of occupation for principal private residence relief can be extended, for tax purposes, to at least 36 months (if not more).

Then we have taper relief. If we ignore the above for the time being and turn to the Revenue's Capital Gains Tax Manual at paragraph 17900, this explains, 'Where expenditure is made to enhance the value of an asset, the date of the enhancement expenditure is not relevant for taper relief. Taper relief is given on the whole gain by reference to the period since the asset was acquired ...'.

We can therefore take non-business asset taper relief on a 3 + 1 year length of ownership. That is, it was held at 17 March 1998, qualifying for the bonus year and was sold after 5 April 2001. And so to the mathematics of the capital gain:

The annual exemption of £7,500 is also available for use if it has not been used elsewhere. - NK.

The curiosity here seems to be that there is a disposal of a dwelling which was the taxpayer's only or main residence, but which had not existed throughout the period of ownership of the underlying land. The exemption in section 222, Taxation of Chargeable Gains Act 1992 clearly applies, and the only question is how the overall gain is to be apportioned between exempt residence in the house and non-exempt ownership of a piece of land.

The legislation provides for time apportionment to be used to split a gain between what is chargeable by reason of absence and what is exempt as owner-occupation, as stated in section 223(2):

'Where subsection (1) above does not apply [i.e. the dwelling has not been the main residence for the whole period of ownership], a fraction of the gain shall not be a chargeable gain, and that fraction shall be:

(a) the length of the part or parts of the period of ownership during which the dwelling-house or the part of the dwelling-house was the individual's only or main residence, but inclusive of the last 36 months of the period of ownership in any event, divided by

(b) the length of the period of ownership.'

Although this is normally applied to the situation where a house has existed throughout but has not been occupied continuously, there seems to be no particular reason not to follow it in this circumstance as well. Periods of ownership before 31 March 1982 are ignored for the section 223 calculation (section 223(7)). It is assumed that the actual occupation is less than 'the last three years' - if building work commenced in 1998, it is unlikely that the building could have been occupied before April of that year. The 'last three years' exemption appears to apply in all cases, even if the house had not been built or occupied by the beginning of the period, so the exempt period is three years out of nineteen (assuming a sale in early April 2001, and working in round months). That gives the following result:

If the sale was on or after 6 April 2001, 10 per cent taper relief would reduce this.

An alternative computation might be suggested using the value of the site in 1998 to calculate the chargeable gain, on the basis that this would be 'fair and reasonable' - the chargeable gain would then be only £55,906 before taper relief. However, the Revenue does not accept that this is a possibility where an apportionment is to be made into chargeable and non-chargeable gains by reason of non-occupation (see Tax Bulletin 12, August 1994). It believes that section 223(2) requires a time-based apportionment in this circumstance, and it is hard to fault this assertion. - Leyborne.

Section 224(3), Taxation of Chargeable Gains Act 1992 denies one entitlement to principal private residence relief, where the property is purchased wholly or partly for the purpose of obtaining a gain on its disposal. This might be the section that brings with it the most trouble.

The more one looks at the query, the more one wonders, why if not for the realisation of a future profit was the land purchased in the first place. Was not the subsequent build just a progression to derive further profits? This is where the anti-avoidance legislation in section 776, Taxes Act 1988 could also be brought into use (and whether that actually matters is largely down to marginal tax rates in any case). This section taxes a gain on land transactions as income, if they are not already reclassified under Schedule D.

If the client has a history of building/big renovation projects, then he may well come under the close scrutiny of the Inland Revenue. Nevertheless, section 224(3), Taxation of Chargeable Gains Act 1992 and section 776, Taxes Act 1988 are not mandatorily applied to self-build projects and it is not abnormal to build a house and move on, for what ever reason. It is essential to examine the facts of the case and the actual intent of the parties. It may well be that the land was purchased for building a home for retirement, and subsequent events changed that. The house could have been built as a family home, and then found to be not quite what one spouse had preferred. All manner of reasons may exist for the subsequent move. The fact that the property was occupied for a moderate period will most certainly stand in the client's favour, and it is this point which gives this case its best hope, when compared with the others that have gone through the courts over the years.

Assuming that the private residence relief will apply to the period of residence, and that there are no other homes in existence (which would probably blight the case), and that the appropriate claims have been made, the chargeable gain will be in respect of the uplift in value of the land, pre-build, and the exempt gain in respect of the period from when building commenced. - Felicitie.

Editorial note. 'NK' has assumed a sale after 5 April 2001, thus attracting taper relief, whereas 'Leyborne' has assumed a sale on or before 5 April 2001.

Issue: 3816 / Categories: