The First-tier Tribunal recently considered the case of William and Hazel Ritchie  UKFTT 449 (TC) which involved the disposal of a main residence. Not only did the property exceed 0.5ha, there was also a gap of seven and a half years between acquiring the land and then moving into the house that had been built on that land.
The case also focused on procedural issues and whether HMRC were in their right to issue discovery assessments. This article does not focus on the procedural arguments of this case, only the capital gains tax elements.
Mr & Mrs Ritchie purchased vacant land in July 1987 for £11,000. The land was part of a dismantled railway line and the only buildings on the land were a large shed and a small building known as the “potting shed”. The size of the land was between 0.65 and 0.7 hectare and there was dispute over what was the exact size.
The Ritchies rented a property on neighbouring land initially and applied for planning permission in 1991 to build a three storey house on the land. Front and back gardens and an alternative driveway to the shed were also constructed and the total cost was £180,000. In the course of applying for planning permission, land in the north east corner was identified which the Ritchies thought they had acquired but it turned out was owned by the Department of Transport. After negotiation, this land was acquired in 2002 with only legal costs incurred. The Ritchies moved into the property in January 1995.
In June 2006, an offer of £2 million was made to the Ritchies to acquire the land and buildings for property development. The offer was accepted and the transaction completed in January 2007.
The disposal was not declared on their 2006/07 tax returns as the belief was that the entire gain was exempt by virtue of PPR. HMRC only picked up on the disposal when an “enquiry” into the Ritchies’ 2006/07 Partnership Tax Return revealed the introduction of capital totalling £2 million.
The First-tier Tribunal decision
The calculation of the capital gains tax liability primarily focussed on the size of the permitted area and the period between acquiring the land and moving into the property that was built on the land.
In terms of that initial period from acquiring the land and then moving into the property after it was built, it was agreed that PPR relief could not apply to that period as the Ritchies were living in another property during that time while their house was being built on the land. The question then was how to calculate the gain that related to that period.
In the case of Henke v HMRC  SpC 550, the gain on a disposal of property was split on a time apportionment basis, which if applied to the Ritchies, would mean that approximately 35% of the overall gain would relate to the period prior to occupation.
The FTT were not comfortable with this approach as the value of the property at the time the Ritchies moved in was £200,000, based on the rateable value after construction. After deducting acquisition and building costs, this would leave a gain of under £10,000 which was far less than the time apportionment approach used in Henke.
As the decision in Henke was at an equivalent jurisdiction level, its decision was not binding and the FTT therefore used the opportunity to go with the provisions of TCGA 1992, s224(2) which allows the apportionment of a gain on a just and reasonable basis where during a period of ownership, there is a change in what is occupied as an individual’s residence due to the reconstruction or conversion of a building among other reasons.
The arguments focusing on the permitted area were difficult to decide. Firstly, there was uncertainty as to what the exact size of the land was; some reports stated a figure of 0.665ha and others showed a figure of 0.699ha. For the sake of brevity, it was eventually agreed to use a figure of 0.699ha.
The question of permitted area was mainly focused on the shed, its proximity to the main house and whether it was required for the reasonable enjoyment of the property as a whole. The FTT concluded that “required” in this context meant necessary and not just desirable.
The shed was 85 metres from the main house and was connected to the mains of the house with permanent cabling. It was used regularly for many purposes including as a garage, workshop and equipment storage. This was enough to convince the FTT that the shed was required for the reasonable enjoyment of the dwelling-house and that the area leading up to and including the shed should fall within the permitted area.
In terms of the remainder of the land, it was determined that land to the East of the property as well as south of the shed was not necessary for the enjoyment of the shed. It was calculated that this land covered an area of 0.1ha meaning that 1/7 of the overall land fell outside the permitted area.
The result of the FTT’s findings meant that a complete overhaul of the capital gains tax calculations had to be undertaken. After taking into account the gain at the point of moving into the property as well as the element of land identified as falling outside the permitted area, the total CGT payable was calculated at around £60k, significantly less than what HMRC had originally calculated.
The disposal of a main residence is often assumed to be relatively straightforward, however this case and the cases that both parties relied on demonstrate that the application of the legislation is never easy.
Those who sell their main residences, especially where the size of the property exceeds 0.5ha should always ensure that they obtain advice from a qualified practitioner who has experience in dealing with this area of tax.
Equally, accountants and tax advisors assisting clients with reporting such disposals should take great care in ensuring that all of the facts are established at the outset. In this case, the accountant failed to establish that the period of occupation did not include the first seven and a half years of ownership, leaving the Ritchies to face questions as to whether their actions were careless.
For further information, please contact the TaxDesk on 0845 4900 509 and ask for Sean Eastwood.