Given the facts, the main decisions, which went against the appellants, in the recent First-tier Tribunal case of John Arthur Day and Amanda Jane Dalgety and HMRC TC04343, published on 14 April, were not surprising. The case underlines how important it is for taxpayers to seek advice on the tax technical issues, ideally be represented at the hearing or at the very least be well prepared for cross-examination.
In essence, the case related to appeals against CGT discovery assessments and penalties relating to three property disposals. The heart of the case concerned the calculation of the gains themselves and the meaning of “acquisition cost” in s 38 TCGA 1992 and consideration, including an interesting decision on the deductibility of painting and decorating claimed as enhancement costs. The case also reaffirms HMRC’s stance on principal private residence (PPR) and the need to demonstrate some degree of permanence and continuity to back up a claim. Anyone involved with property CGT will find this ‘CGT mixed bag’ of a case interesting.
Before the assessments could be considered, the Tribunal had to satisfy whether the discovery assessments had been made in time.
The three properties in question, 64 Wainwright, 14 Somerville and 52 Blenheim Way, had been acquired in joint names of the appellants Mr Day (Day) and Miss Dalgety (Dalgety), an unmarried couple. The properties were all sold in 2006 but the disposals had not been shown on their respective 2006/7 self-assessment returns. The reason given in respect of Wainwright and Somerville was that the appellants believed the gains were below their annual CGT exemptions. In respect of Blenheim, they took the view that any gain was covered by PPR.
The assessments were raised in January 2012 outside the usual four year time limit imposed by s 34 TMA 1970, but HMRC argued that the appellant’s carelessness extended the time limit to six years under s 36 TMA.
Day who prepared Dalgety’s return as well as his own, initially accepted carelessness but later in the hearing changed his mind. Likewise, Dalgety changed her view on certain facts which did not help their case. Both were found not to have read the CGT guidance and that Dalgety had relied on Day on the basis he worked for an accountancy firm, albeit as an admin clerk, but admitted she knew he had no experience of CGT. Weighing up the facts the Tribunal agreed that both Day and Dalgety had been careless and that the discovery assessments had been made in time.
In relation to the sale of all three properties, the appellants had:
- deducted from the sale consideration amounts paid to the solicitor to redeem the outstanding mortgages, mortgage fees and redemption fees;
- reduced the acquisition costs by the mortgages taken out on the property;
- claimed mortgage fees as deductible under s 38 (1) (c) and (2) TCGA 1992, as incidental costs of disposal.
The Tribunal accepted HMRC’s contention that the consideration to be used as the starting point under Section 38 must be the price paid by the purchasers. Similarly they agreed that the acquisition cost was the amount the purchaser gives or gives up in return for the property notwithstanding that the appellants were lent sums of money to help them purchase the properties.
In relation to the mortgage fees the Tribunal again accepted HMRC’s position that as these costs were not specifically mentioned in s 38(2) TCGA 1992, that the costs were not deductible.
In relation to Somerville, the appellants had claimed that a deposit paid by them under a scheme called the Vendor Paid Deposit Scheme was not deductible from the selling price. HMRC’s view was that the full consideration should be shown in the computation. The Tribunal did not agree and took the view that the deduction was contractual and should be deducted from the consideration.
52 Blenheim Way and PPR
According to Day he moved into this property in May 2006 as a main residence for him following what was described as a massive fall-out with Dalgety at Christmas 2005 following which the couple had permanently separated. Prior to this the couple had lived at ‘Riverside’ a jointly owned property. In his view the sale of the property some three months later was eligible for PPR despite the fact he had agreed to go back and live with Dalgety a month before the eventual sale.
At the time of the appeal hearing Dalgety had changed her view and accepted that her gain on disposal was not eligible for PPR. HMRC highlighted a letter signed by both parties which stated that the property had been purchased as a main residence for Day and as a second home for Dalgety. The letter made no mention of the appellants split up and the Tribunal found this inconsistent with their claims.
The property was bought in joint names the reason being that Day was unable to get a mortgage in his own name. Dalgety also paid £5,000 of her own money which she described as a ’gift’. Dalgety also said that the joint savings had been used but this was disputed by Day. In cross-examination Day admitted that both he and Dalgety had not discussed putting Blenheim in his sole name.
The property was dilapidated and a new Kitchen was needed plus a general refurbishment. It transpired that the new kitchen and other materials were invoiced to Riverside and were delivered to that address instead of Blenheim. This was due to a matter of security but also because Dalgety provided the financing and knew the tradesmen. Although Day eventually admitted he did set up a separate bank account this did not have sufficient funds so the costs of the refurbishment were met from the joint account.
Despite earlier confirmation from Day by letter to HMRC, it transpired under cross-examination that Day had not notified HMRC or his own employer of his change in address. Day’s view was that he had bought a top of the range kitchen and had it professionally fitted hardly the actions of someone not intending to use it as a main residence. It transpired however that the kitchen costs highly discounted were fairly modest.
A number of other inconsistences and inaccuracies were unearthed during the hearing which undermined Day and Dalgety’s case.
HMRC’s view was that the appellants were lying about their split up and Day’s occupation of the property. Even if he had stayed at the property he did not do so with the intention of taking up permanent residence. They cited the case of Goodwin v Curtis  which considered the use of temporary accommodation with no degree of permanence or continuity. The facts that Dalgety held an interest in the property and that financing went through the joint account were key points in their view.
Based on the facts, the Tribunal found that Day’s asserted intention implausible. If he did stay at Blenheim, Day did not do so expecting to make it his permanent or continuing home. In essence they thought Day was being untruthful and for those reasons found that PPR was not available to Day.
The Tribunal also considered the deductibility for painting and decorating as enhancement costs against the capital gain. Section 38(1) (b) TCGA 1992, provides that costs incurred wholly and exclusively on the asset for the purpose of enhancing its value, being expenditure reflected in the state or nature of the asset at the time of disposal, are deductible.
HMRC accepted that the costs had been incurred with this in mind but did not accept that the costs were reflected in the state or nature of the property at the time of disposal. The Tribunal did not accept HMRC’s view. They found that on the balance of probabilities, that the state of the walls and woodwork was such that the painting and filling of the walls etc. contributed to increasing the market value of the property.
This is an interesting aspect and although the costs involved, in this case were only £1,200, this decision may be useful in other similar cases where the costs could be considerably higher.
The final aspect of the case was to consider the level of penalties. As a result of the adjustments to the CGT computations, the chargeable gains for Day and Dalgety had reduced from £15,043 to £13,285. But these reduced figures still, in the Tribunal’s view represented a serious under-declaration. The Tribunal therefore decided to leave the penalties imposed by HMRC, which included, in their opinion a generous abatement of 30%, unaltered.
The importance of this case
The case provides a useful reminder of how mortgage costs fit within a capital gains computation following the disposal of property and includes an interesting decision on enhancement costs. It also highlights HMRC’s more qualitative approach to PPR claims and the importance on clients to demonstrate a degree of permanence and continuity of occupation.
Overall, it emphasises how important it is to be certain on all the facts and to prepare robust arguments that will stand up to cross-examination. Ironically if Day and Dalgety had sought professional assistance, the case may have been settled without going to Tribunal.
If you require any further information in relation to this case or CGT matters, please ring the TaxDesk on 0845 4900 509 and ask for Martin Mann.