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Approximately three years ago, Mr A, whilst living with but not married to Ms B, purchased a derelict mansion with surrounding land for £245,000.
It is believed that if the mansion was not derelict, upon its sale the area of land would be regarded as part of the main residence for capital gains tax purposes, it being required when considering the size and character of the house.
Approximately three years ago, Mr A, whilst living with but not married to Ms B, purchased a derelict mansion with surrounding land for £245,000.
It is believed that if the mansion was not derelict, upon its sale the area of land would be regarded as part of the main residence for capital gains tax purposes, it being required when considering the size and character of the house.
Two static caravans have been welded together and placed on the site and connected to all utilities including telephone. A and B (who have still not tied the knot), together with their children, have lived in the caravans throughout the period of ownership of the property by A. Planning permission has been applied for, but not yet granted, to renovate the mansion (which will become the family home) and to convert the outbuildings into holiday cottages for letting.
A is proposing to sell to B a one half share of the site. B has £170,000 available. The current value of the site is, say, £500,000. Will A be disposing of part of his main residence for capital gains tax purposes? Also, A and B, being unmarried and thus not being 'connected', can presumably enter into any bargain they wish. Consequently, is there the ability to arrange the consideration being paid by B in order to fully mitigate any possible capital gains tax and stamp duty land tax liabilities?
Readers' thoughts would be gratefully received.
Query T16,695 — Room With View.
Reply by JdeS:
The key to considering this type of problem is an appreciation that 'grounds' within TCGA 1992, s 222(1)(b) must relate to a 'dwelling house' within s 222(1)(a). One has, therefore, first to identify the latter.
Although the mansion had originally been 'a' dwelling house, it does not appear to have been A's home at any time within A's period of ownership. The actual dwelling house was clearly the welded-together caravans linked up to main utilities. Moreover, the fact that an application for planning permission is needed to renovate the mansion house is supportive of this construction.
It follows that, for the purposes of s 222(1)(b) — in practice, presumably, an area in excess of the half hectare granted automatically by s 222(2) and therefore subject to assessment under s 222(3), (4) — the question of whether any 'larger' area falls within the 'permitted area' must be considered in the context of the 'size and character' of the caravan complex, rather than the former mansion house.
While, by reason of the fact that the ownership of buildings on land is by law the same as that of the land itself, the mansion and outbuildings (or some of them) are capable of falling within the s 222(1)(b) area, it seems difficult to foresee the former (at any rate) as 'required for the reasonable enjoyment' of the caravans. In fact, being derelict, it may well be dangerous to go into it.
It follows from this that the District Valuer would be likely to draw the boundaries of the s 222(3) area in such a way as to exclude the site of the mansion, with the result that only or main residence relief would not be available in relation to a disposal of a half share in it to B.
The fact that A and B are unconnected merely means that open market value does not apply automatically under TCGA 1992, s 18(2). Any transaction between them at an undervalue would, however, still fall to be taxed on an open market value basis under TCGA 1992, s 17(1)(a) because the bargain would not have been at arm's length.
It may, however, be possible for a substantial tax charge to be avoided by A granting B a 50-year plus building lease of the outbuildings at a 'modern' ground rent and for her to use her capital to reconstruct them. A would, of course, have to pay income tax on the rent received, but this would be deductible by B in her personal computation.
Reply by N.K.:
In connection with claiming main residence relief under TGCA 1992, s 222, it is possible to not actually live in the premises concerned, when you own two such properties and live in the second one. At present, the place under scrutiny is uninhabitable, whilst the two caravans joined together are the place of residence and under HMRC's Capital Gains Manual CG64327 are treated as the only or main residence.
There is thus the need to determine whether the two static caravans have obtained a buildings status so that the surrounding land is included as part of the main residence under s 222(1)(b). I think that we must look more closely at the actual facts.
We are told that planning permission has been applied for, but the question is how long was this after the site was purchased? As it is Mr A's intention, if granted permission, to live in the renovated mansion as the family home then under Extra-statutory Concession D49 it is possible that up to a maximum of two years before actual occupation, the property will be treated as his main residence. The relevant wording of the ESC is '...where an individual purchases an existing house and, before using it as his only or main residence, arranges for alterations or redecorations ... In these circumstances, the period before the individual uses the house as his only or main residence will be treated as a period in which he so used it for the purposes of TCGA 1992, s 223(1), (2)(a), provided that this period is not more than one year. If there are good reasons for this period exceeding one year, which are outside the individual's control, it will be extended up to a maximum of two years. Where the individual does not use the house as his only or main residence within the period allowed, no relief will be given for the period before it is so used. Where relief is given under this concession it will not affect any relief due on another qualifying property in respect of the same period'.
This last point means that an election under s 222(5) to determine which of the two residences is to be counted as qualifying for the relief is not required.
As there are two static caravans on site that have been connected to the utilities, the Capital Gains Manual CG64327 confirms that as a question of fact they will be regarded as a dwelling house. The question now arises about the site and because of its size whether, under s 222(1)(b), it will all qualify as 'the permitted area'. If all goes as planned and the mansion is refurbished and lived in, then presumably the size of the surrounding land will be in character with the area and so qualify for main residence exemption. However, based on the current position, and despite future intentions, it appears to be unlikely that the whole of the area of the land will be recognised. Therefore, if A sells half of the site to B, a suitable fraction will not come under main residence exemption from capital gains tax, although this will no doubt, because of the circumstances, be open to argument, and depends on whether the sale takes place before or after the refurbishment in question.
The matter of A disposing to B a one half share of the site for less than fifty per cent of the current value, should not be a problem (see Bullivant Holdings Ltd v CIR [1998] STC 905). However, looking at CG14542, which falls under the 'Market Value Rule' section, I wonder whether HMRC might challenge the position. This paragraph says that 'a transaction is “otherwise than by way of a bargain made at arm's length” when one of the persons involved in the transaction does not intend to get the best deal for themselves from that particular transaction. That person enters into the transaction with the subjective intention of giving some gratuitous benefit to the other person. Where one of the parties to a transaction has the intention of conferring a gratuitous benefit on another party to the transaction then the transaction is otherwise than by way of a bargain made at arm's length and the market value rule applies. This test can apply to a wide range of circumstances ...'.
