Replies to Queries - 2 - Converted house

My client has owned the freehold of the house in which she has lived since before 1982. Our client's freehold interest is subject to two long leases of what were two self-contained flats within the freehold house.

In September 1996 our client purchased one of the long leasehold flats for £245,000 and in March 1998 our client purchased the other long leasehold flat for £275,000.

After the purchase, our client altered the flats so that they were no longer self-contained and she used the whole property as her main residence. It has been charged to council tax as a single residence.

For very many years our client has traded from her home claiming a proportion of her house expenses against the business, latterly by means of a rent charged to her company following incorporation.

In July 1999 she granted her company a licence to let the flats and she charged the company a rent equal to her mortgage and other costs so that her company had a Schedule A profit and she had no taxable profit or loss. However, the titles could not be merged at the Land Registry until her outstanding mortgages are redeemed.

In the event of our client's future sale of the whole house, will the Revenue accept that the whole house became our client's main residence after the joining up of the three units in 1998?

(Query T16,053) - Stately home.

What constitutes the taxpayer's residence is a question of fact and degree, see Green v Commissioners of Inland Revenue, [1982] STC 485 and Batey v Wakefield [1981] STC 521. Furthermore, it is the quality of her presence which is decisive as to whether she actually resides there, and this is, again, a question of fact and degree (Goodwin v Curtis, [1998] STC 475). It would be reasonable to conclude from this that there is no reason, in principle, why it would not have been possible to add either or both of the bought-in flats to the area of 'residence'. That said, the evidentiary burden upon this particular taxpayer seems to be very high in view of the following factors.

(1) She was carrying on her business from her home, making it seem extremely likely that at least some of the increased floor area was devoted exclusively to business use, thus requiring an apportionment up to the date of incorporation, under section 224(1), Taxation of Chargeable Gains Act 1992.

(2) She (presumably) gave her company an exclusive licence over a discrete area (in relation to which it should have been assessed to rates, the area being treated as a separate hereditament), with the result that this area ceased to be part of the 'dwelling-house' from that date.

(3) In relation to the former flat bought in March 1998, the length of time before this was let off again through the company (16 months) may not assist in relation to establishing the factual situation of intervening 'residential' status.

(4) The intervening transaction with regard to the two bought-in flats appears more likely than not to constitute the creation of a lease under the test in Street v Mountford (1985) AC 809, not least in the circumstances in which consent should have been obtained from the mortgagees before doing this. (The fact that the mortgages mean that separate titles have to be maintained at the Land Registry is, however, irrelevant). The end result is likely to be the same as in (3) above; bearing in mind that the local authority would have been justified, under rating precedents, in subdividing the property again for council tax and the fact that they have not done so does not weigh much in the balance to the contrary.

(5) The fact that the flat bought in 1996 was treated in the same way as that bought in 1998 is unlikely to be helpful in persuading the Inspector that, in the context of (3) above, it should not be looked at in a favourable light. He will be as aware as the enquirer of the consequences under section 223(2) and (4), Taxation of Chargeable Gains Act 1992 of any period of 'residential' qualification being accepted for the bought-in parts of the property.

It must, furthermore, be borne in mind that, were the Revenue to be pressed too hard on this issue, there must be some possibility of it contending that the 1999 flat 'licencing' arrangement constituted a settlement under section 660G(1), Taxes Act 1988, with the result that the rental surplus attributed to the company as profit should, for tax, be reallocated to its proprietor as Schedule D, Case VI income under section 660A, Taxes Act 1988.

- Venta Belgarum.

There seems to be some inconsistency between the stated use since March 1998 of the whole premises as the client's main residence on the one hand and, on the other, the renting since July 1999 to the company of the two flats under a licence whereby unspecified strangers are in actual occupation at a rent profitable to the company.

In view of the fact that the flats have now apparently recovered their identity, it seems unlikely that the client effected significant alterations when they were vacated by the long leaseholders.

In Honour v Norris [1992] STC 304 the problem concerned four flats, each of which was located in parts of houses in close proximity in a London square, where only some had adjacent structures. By reason of increases in the family, the various members came to occupy all four flats, after physical alterations in some instances. The Kensington General Commissioners heard detailed evidence and reasonably accepted the set-up as constituting a single dwelling, a conclusion in line with a Court of Appeal decision in Langford Property Co Ltd v Goldrich (1949) 1 KB 511. Nevertheless, the judge refused main residence relief.

The 'stately home' tag invites reference to Green v Commissioners of Inland Revenue [1982] STC 485 where wings of a mansion were excluded.

Detailed evidence of the alterations should be submitted with a request for a post transaction valuation check, having regard to self assessment risks. - Lane.

Issue: 3869 / Categories: