.png)
.png)
IN CASES WHERE a private residence is sold for development, there would be much to be said in terms of fiscal parity for restricting the private residences relief to gains computed by reference to current use value. But this was not done even for the purposes of development land tax.
Accordingly, we have to face the somewhat artificial exercise of arriving at the ‘permitted area’ by reference to the character of a dwelling where either the dwelling is to be demolished or its character radically affected by the surrounding development.
In Longson v Baker [2001] STC 6 the High Court was unsympathetic to the highest degree to a claim that the relief applied to 7.56 hectares of development land, most of which was used for grazing horses stabled on the premises. It may be that a cooler approach would have served the Court better.
A Special Commissioner had dismissed the taxpayer’s appeal on the ground that although the stables were agreed to be part of the dwelling house, and although the evidence was that keeping horses implied requiring land to graze them, the stables could be converted to some other use, thus making their use as stables irrelevant. This decision was criticised as wrong in law in the report of the decision ‘No Exemption for Grazing Land’ in Taxation, 8 June 2000 at page 262.
The High Court has dismissed the appeal from the Special Commissioner holding that the taxpayer’s argument was based on a subjective test of what is required for the reasonable use and enjoyment of the house ‘as a residence’. The purpose of this article is first, to explain why the taxpayer’s claim was sound in principle but wrong in amount, and second, to consider a possible alternative approach to maximising relief where, as in Longson, the grazing land has development value.
Private residences relief
Section 222, Taxation of Chargeable Gains Act 1992, when read with section 223, applies so as to exempt
‘(1) … a gain accruing to an individual so far as attributable to the disposal of, or of an interest in—
‘(a) a dwelling‑house or part of a dwelling‑house which is, or has at any time in his period of ownership been, his only or main residence, or
‘(b) land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area.
‘(2) In this section “the permitted area” means, subject to subsections (3) and (4) below, an area (inclusive of the site of the dwelling-house) of 0·5 of a hectare.
‘(3) Where the area required for the reasonable enjoyment of the dwelling-house (or of the part in question) as a residence, having regard to the size and character of the dwelling-house, is larger than 0.5 of a hectare, that larger area shall be the permitted area.’
The provision in subsection (3) that the area claimed be ‘required for the reasonable enjoyment of the dwelling-house’ means that the stables must form part of the dwelling for the present argument to arise. The parties agreed that the stables were part of the dwelling, but surprisingly the agreement extended to stabling for 12 horses. This in turn led to the claim for an area of over seven hectares. On the facts it is unclear how such a large area of what appears to have been plain grassland met the requirement of being ‘garden or grounds’: subsection (1)(b). The expression ‘grounds’ implies ornamentation by landscaping or planting or both to create a setting for the house. Paddocks do not normally have this character, but no point on this was taken and there are no findings of fact that throw any light on the question.
Objectivity
It has been mentioned that the Special Commissioner accepted the Inspector’s argument that the use of the stables to accommodate horses should be disregarded because the stables could have been converted to other uses. In the High Court the taxpayer attacked this reasoning on the ground that it failed to recognise the equestrian character of the dwelling-house. The Court countered this by stressing the expression ‘required for the reasonable enjoyment of [the dwelling-house] as a residence’:
‘It is clear from the words “required for the reasonable enjoyment” in sub-section (3), that the test to be applied as to what any larger permitted area can consist of over the 0.5 hectares allowed by the section, is an objective test. In my judgment it is not objectively required, i.e. necessary, to keep horses at a house in order to enjoy it as a residence. An individual taxpayer may subjectively wish to do so but that is not the same thing.’
It is clear that the test is objective, but it falls to be applied to the dwelling having first identified the size and character of the dwelling. In Longson, the stables gave the dwelling the character of an equestrian property. The evidence was that a property of such a character requires grazing land.
It may be helpful here to consider the position of a tennis court or a swimming pool. It is not necessary that the occupier of a house with a tennis court should be a tennis player in order for him to enjoy the house as a residence. But that is not the statutory question. In establishing the ‘area required for the reasonable enjoyment of the dwelling house as a residence’, one is looking to the expectations of prospective purchasers (as a class) of properties of the size and character in question. For properties of a certain type in certain areas, the market expectation is for a tennis court and/or swimming pool. That is enough to meet the statutory test. This gives effect to the objective requirement of an area required for the ‘reasonable enjoyment’ of the dwelling. It is immaterial that some buyers might choose to buy the property and never use the tennis court. The test is not one of ‘necessity’ and it is disappointing that the Court appears to have given little thought to the practical implications of treating it as such.
Finally the judge made the following revealing comment:
‘It is apparent that if the taxpayer’s submissions in this case are endorsed by this court, there will be a substantial increase in the demand for horses among the owners of houses with grounds which have development potential. In my judgment, this cannot have been the statutory purpose of the legislature in legislating section 222(3).’
It is obvious that the Court was startled by the very large area claimed as exempt. This instinctive reaction was well-founded in that stabling for 12 horses goes beyond anything that today could be regarded as residential use. While such use is capable of covering stabling for up to (say) four animals, the facts in Longson show that the establishment was bordering on the professional. This would have been a reason for greatly reducing the permitted area from that claimed, but (subject to the way in which the case was put) was not a reason for rejecting entirely the case based upon the equestrian character of the property.
Ransom value of access
Longson may or may not go to the Court of Appeal. If the decision of the High Court remains the last word then another route to relief should be considered. Such a route is required in any case where the paddocks are not grounds. In the sale of land for development, a case can often be made for apportioning extra value to the permitted area on the basis that it contains the only road access (with a corresponding reduction in the value attributable to the non-exempt land). This rests upon the real world experience where a ransom strip has to be acquired for development to proceed. However, as we shall now see, district valuers are under strict instructions not to concede the application of this principle to section 222 cases.
An example best illustrates the point. A dwelling has a permitted area of 0.5 hectares and other land of 2 hectares. There is only one point of access to the whole and this runs from the road through the permitted area to the non-exempt land. If a developer had to buy the permitted area to open up the non-exempt land, about 30 per cent of what would otherwise be the value of the non-exempt land would be added to the site value of the permitted area. Does this apply to section 222 cases where by hypothesis the whole area in question is in the same ownership?
Rights of way
There are two provisions that bear on the question of the Valuation Office’s assumptions as to rights of way. The first is section 222(4) which reads:
‘Where part of the land occupied with a residence is and part is not within subsection (1) above, then (up to the permitted area) that part shall be taken to be within subsection (1) above which, if the remainder were separately occupied, would be the most suitable for occupation and enjoyment with the residence.’
The second provision is section 222(10):
‘Apportionments of consideration shall be made wherever required by this section or sections 223 to 226 and, in particular, where a person disposes of a dwelling-house only part of which is his only or main residence.’
In the example, we have a single sale of the 2.5 hectares and we have to apportion the consideration between the permitted area of 0.5 hectares. and the balance of 2 hectares. Let us assume that disregarding access considerations, the development value is spread evenly. In this situation the Valuation Office Manual states in paragraph 8.62 (Private residences relief):
‘Where one apportioned part of the whole land has no access of its own, its constituent value should normally be found by assuming a right of way across other parts of the land.’
Further at paragraph 8.64 (Ransom value cases) it says:
‘Where it is necessary to apportion a sum which reflects overall development potential and the land is all physically of the same quality, then an area based apportionment will usually be appropriate. District valuers should not attribute any “ransom value” to part of a site because this could only arise if the land were valued as if it were a separate entity in different ownership from the rest of the site. It is considered that such an assumption would not result in a just and reasonable apportionment.’
The manual makes heavy use of assumptions as to rights of way. It is even postulated at paragraph 8.44 that the permitted area need not include road access on the ground that:
‘Where the residence enjoys an existing long access drive or, for example, is situated in an extreme corner of its land it could be argued that there is no need for the access to form part of the land required. If so, then an easement or right of way must be assumed to exist over the non-exempt access land and this should be taken into account in any apportionments.’
These approaches are not sanctioned by the legislation. The observation that the recognition of ransom value would not be just and reasonable simply begs the question (under section 52(4) apportionments have to be made on a ‘just and reasonable’ basis). The position is that having identified the permitted area on the separate ownership hypothesis of section 222(4), it is logical to apply that hypothesis in apportioning value between the land in the permitted area and land outside.
Moreover, in Enterprise Zone Investments [1996] STC (SCD) 336 it was held that in the absence of specific provision, a ‘just apportionment’ normally implies a formula of the A/AB type applicable to part-disposals.
Thus, A would be the value of the permitted area considered alone and B would be the value of the non-exempt land considered alone. A would be inflated by the ransom value of the permitted area and would thus attract a corresponding proportion of the whole price.
Readers who take this point may find that while it is never conceded, it may result in unexpectedly favourable agreement on other issues such as the size of the permitted area. But it is not just a bargaining point and if necessary should be taken to appeal.
