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My client is the life tenant in the trust of her late father and resides in the trust property as her principal private residence.
The property had originally been purchased by her father as a detached dwelling surrounded by an acre of garden and a five-acre paddock, which has been used by my client for stabling her own horses or for private grazing purposes only.
My client is the life tenant in the trust of her late father and resides in the trust property as her principal private residence.
The property had originally been purchased by her father as a detached dwelling surrounded by an acre of garden and a five-acre paddock, which has been used by my client for stabling her own horses or for private grazing purposes only.
The trustees have sold part of the actual garden, i.e. 0.2 acres for £181,000. As the 31 March 1982 value of the part sold would presumably be negligible, there is potential for quite a large capital gains tax bill, unless there is a case for claiming exemption under section 222(2), Taxation of Chargeable Gains Act 1992.
What are the chances of succeeding in claiming the exemption? If they are slim, how should the gain be determined if the 31 March 1982 value of the part of the garden sold was, say, £2,000?
(Query T16,124) - Lennie.
On the face of it, there should be no problem in the trustees obtaining principal private residence exemption here for the following reasons.
* By virtue of section 12, Trusts of Land and Appointment of Trustees Act 1996, the life tenant appears to be entitled to occupy the property and section 225, Taxation of Chargeable Gains Act 1992 would therefore attribute the characteristics of the occupant to the trustees.
* The garden being confined to an acre, the whole of it is likely (when added to the footprint of the house itself) to come within the half of a hectare specified by section 222(2), Taxation of Chargeable Gains Act 1992, for which no subjective judgment is required under section 222(1)(b). The paddock would clearly have been excluded from consideration under Longson v Baker [2001] STC 6.
* Where the house is still used as the main residence at the time part of the (exempt) grounds is sold, section 222(1)(b) applies to the part sold off: see Varty v Lines [1976] STC 508.
* The Inspector may well ask the life tenant for her confirmation that the property has been her principal private residence since 1982 - presumably she has not made an election under section 222(5)(a), Taxation of Chargeable Gains Act 1992 for any other property?
As far as the 1982 value is concerned, the easiest course of action is to obtain a valuation of the whole property at that date and treat the proportion of it found under the A/A+B formula in section 42(2), Taxation of Chargeable Gains Act 1992 as in point. ('B' is the value of the property remaining unsold immediately after the sale of the 0.2 acre garden plot.)
But the valuer may advise that it would be better in the long run (if there is any possibility of selling off the paddock) to opt for the area sold to be treated, and valued, as a discrete asset in 1982. - Venta Belgarum.
Section 222(1)(b) of the Taxation of Chargeable Gains Act 1992 provides that on the sale of land used for occupation and enjoyment with a residence, as its garden or grounds up to the permitted area, any gain on that disposal is exempt from tax.
The permitted area is 0.5 hectares, which is approximately 1.25 acres. Section 222(3), Taxation of Chargeable Gains Act 1992 goes on to say that where the area required for the reasonable enjoyment of a particular residence is greater than 0.5 hectares, the greater area shall be the permitted area.
'Lennie's' client has a garden of about one acre plus a five-acre paddock. The area that has been sold formed part of the garden, and that is less than the permitted area, so full private residence relief is given.
The guidance in the Inland Revenue's Capital Gains Tax Manual at paragraph CG64363 indicates that land fenced off from the residence should be excluded from what is considered to be garden or grounds. However, in the following paragraph - CG64364 - it states that a paddock should not be excluded if there is no significant business use. Given that a paddock will always be fenced off, it is not clear how the two paragraphs can be easily reconciled.
As already stated, if the paddock is excluded, no tax is payable on the gain on the sale of the land. But if it is argued to be part of the garden or grounds, the next hurdle then becomes whether, in view of the size and character of the property, the full six acres are required for the reasonable enjoyment of the property, so that this larger area is the permitted area.
In that event, with a separate disposal of part of the garden or grounds, 'Lennie' is probably going to have what is known as the prima facie argument placed before him by the Inspector.
The argument is that if an area of land is sold and the taxpayer continues to own the rest of the property, the area that has been sold could not, therefore, have been required for the reasonable enjoyment of the property. As a result, the permitted area will not then include the area that has been sold and consequently no private residence relief is given.
Two possible rebuttals to this argument are contained in the Inland Revenue's Capital Gains Tax Manual at paragraph CG64834:
* A disposal within the family, e.g. to enable a son or daughter to assist his/her parents as they become older.
* Financial necessity, where a taxpayer has to realise part of his assets.
In this case, a third point comes to mind. The people making the decision will be the trustees and it is quite possible that the beneficiary is not a trustee and so the matter is completely out of her hands.
If these arguments fail, the last line of defence is that where the gardens or grounds exceed the permitted area and the whole area is not required for the reasonable enjoyment of the property, the location, within the overall area, of the permitted area must be determined by the District Valuer. A copy of the plan of the property with the location of the permitted area marked on it will be given to the Inspector; if 'Lennie's' client does not agree with the location, this can be appealed.
However, I do not believe that this will be required, as the legislation at section 222(4), Taxation of Chargeable Gains Act 1992 sets out a statutory test, where the garden or grounds of a house exceeds the permitted area and part falls within the private residence relief and part does not. The part qualifying for relief is that part which, if the remainder were separately occupied, would be the most suitable for occupation and enjoyment with the residence. Common sense dictates that this would be the area of land adjoining the house, which is the garden, of which part has been sold.
It may come down to an argument about the location of the permitted area, but on the basis of the facts as presented, capital gains tax private residence relief will be available on the disposal. - Hodgy.
Extract from reply by Wentworth:
The grounds of the house in question comprise a garden of one acre plus a paddock of five acres. However, the information is not sufficient to determine conclusively whether it would all fall within the permitted area. Particular factors which will affect the size of the permitted area include the following:
* Is the house in the countryside where it is more normal to have a large garden and a paddock?
* Is the house of a size that would normally have such a large garden?
* Has the house always had the garden and paddock associated with it?
* Does all of the land appear on the same title deed as the house?
* Do other houses nearby of a similar age and size have grounds of a similar size?
Editorial note: It is noted that 'Lennie' acts for the life tenant, rather than the trustee. From the replies received, it would seem likely that if the land sold is treated as part of the acre of garden, then there is a strong case that the principal private residence exemption, as extended by section 225, Taxation of Chargeable Gains Act 1992, should apply.
However, as an 'interest in possession' trust, the declaration of any gain should strictly be made by the trustees and they would be liable for any liability that might arise; for example if the plot sold was treated as part of a larger 'garden' including the paddock and this did not fall within the exemption.
Unless the life tenant is disabled, the trustees would then only be entitled to a reduced annual exemption and the gain would be charged at 34 per cent, rather than treated as the top slice of the beneficiary's income. It is probable that, if the trust has, to date, produced no income, then annual self-assessment tax returns have not been issued to it. It would seem that 'Lennie' will need to contact the trust's accountants to confirm responsibility here and ascertain whether or not there is an Inland Revenue reference (possibly dormant) for the trust.
Trust tax returns can be downloaded from the Inland Revenue's website and, if it is not already known, details of the specialist trust office to which a return should be sent can be found at www.inlandrevenue.gov.uk/trusts/addresses.htm
