Archives for posts with tag: capital gains tax

Olympic Torches, Taxation and more

I have recently set up a separate blog at and intended to record some slightly lighter-hearted points there – I recently added one concerning Olympic Torches and their taxability – but on reflection this raises one of those perennial subjects in taxation – whether an activity is or is not a trade.

Firstly lets remind ourselves about the Torch Story

8,000 people are taking part in the flame relay, some are celebrities, some connected with olympic sponsors but many ordinary people chosen though schemes like that established by Lloyds Bank.

After their part of the relay the person selected can keep the torch and tracksuit on making a payment of £215 which is roughly half, so we are told, the actual cost of the torches themselves.  Now some will keep the torch as a souvenir but many have already found their way onto the online auction sites.

HMRC decided to get in the act by issuing a press notice pointing out that the torch is a chattel – tangible moveable property – the significance of this being that if sold for more than £6,000 a capital gains tax liability might arise.  They also pointed out that online traders and others might have an income tax liability even if sold for less than the chattel exemption.

An argument which HMRC do not explore is that if the torch could be said to be machinery then it would be deemed to be a wasting asset and so would be exempt, unless used in a business, regardless of what it was sold for.  The torch does convert gas into a flame thereby providing illumination which should satisfy at least some definitions of what a machine is.

At the moment there doesn’t seem to be much chance of a CGT liability as the market price on eBay seems to be about £3,000 although some vendors are holding out for more!

A number of people have raised a question though – is it possible that a person who buys their own torch because they immediately plan to sell it on is trading and so would be chargeable to income tax on the profit?  Trading as a concept in tax law includes not only the obvious act of regularly buying and selling goods but also can be a one-off transaction, or ‘an adventure in the nature of trade’.  Lawyers look at what are called the ‘badges of trade’ in trying to decide whether such a liability is likely to exist – these are concepts derived from many taxation cases that have been considered in the past – one problem is that they often refer to circumstances that arose many years ago.

One case that is often advanced by HMRC in arguing that an ‘adventure in the nature of trade’ has been conducted in the Rutledge case.  This case, heard in the 1930’s, concerned a man who supposedly bought and then resold 1 million toilet rolls, the courts concluding that this was an adventure in the nature of trade as the subject matter of the transaction was such that a purchase and resale of household goods, unless surplus to personal requirements, could only be explained as an ‘adventure in the nature of trade’.  There is a suggestion that the toilet rolls never existed, that they were a convenient fiction to conceal the real, and illegal, nature of the goods that were being traded in!

A Royal Commission looked at the nature of trading some 40 years ago but even their conclusions – the so called badges of trade, have been expanded and altered over the years.  One problem was applying them to new types of transactions – for example – property development, in the UK before the second world war this was normally a process of expansion as cities grew and developers bought farming land and constructed suburban housing estates – usually clearly trading.

With the advent of the second world war large parts of our inner cities were destroyed and needed post-war rebuilding, but when this process had been largely completed developers didn’t go back to expanding the suburbs, planning laws and the green belt movement ruled this out.  Instead they looked to acquire city centre sites, assembling a larger site from many smaller ones and REdeveloped – often changing the use of the land from residential to commercial and making substantial fortunes in the process.  Harry Hyams who developed the Centre Point Tower in Central London specialised in keeping property empty on the grounds that that building value was a function of rental yield and future rental values would be make the building worth more empty than immediately selling the building on – was this trading?

In the 1970’s and 1980’s the courts considered this problem in the cases of Taylor v Good and Marson v Morton.

Taylor v Good in 1974 concerned a greengrocer who purchased a large landed estate at auction in 1959 before post-war building controls were removed – he had grown up in the house as his parents were servants on the estate – he then, claiming that he wanted to occupy the property as his residence, applied for and obtained planning permission to convert the estate into 93 individual dwelling units.  Before carrying out this programme he sold the property to an established developer for a very substantial sum as the restrictions had then been lifted.   The courts applied the traditional badges and concluded that his motive had been to live in the property until he received an offer he couldn’t refuse – if he formed an intention to trade it was when the offer was received and this would cause the special rule on appropriation to be invoked.  If you acquire an asset for a non-trading purpose and then decide to bring it into a trade it is ‘appropriated’ at it’s current market value not the original cost, this would be a deemed disposal for CGT purposes and probably the greatest part of the increase in value would have been taxed as a gain.

The courts were looking at a type of transaction that was quite new and the existing badges could be made to fit, but only with a struggle.  Marson v Morton in 1986 concerned four brothers who bought a plot of land on the advice of a property developer – they were told “it would be a good thing” and sold it three months later. After repaying the overdraft they used to finance they acquisition they had doubled their money in this short period of time.  One of them admitted that they purchased the land as a ‘speculation’ although another claimed that they intended to keep it as an investment – even though it would not produce any income and could only generate a profit by sale and it was financed by short-term borrowing.

The court in this case decided to restate the ‘badges of trade’ to make them relevant to property transactions of this type and added factors such as the method of financing, and previous expertise in a particular type of transaction.  Notwithstanding this the commissioners found as a fact that the land was bought as an investment and the High Court found that they could not disturb this finding, the speculation was not an adventure in the way of trade.

A runner in the torch relay, particularly if a sponsored one, did not acquire the torch as an adventure in the nature of trade and if they formed an opinion that they did wish to sell it even this would probably not be an adventure in the nature of trade.  Even if it were the torch would be appropriated at current market value, presumably close to what it was eventually sold for.  Of course if a trader purchased a torch from a participant and then sold it on that would almost certainly be a trading transaction, but they would pay a lot more than £215 to acquire the torch – one would hope!

But this question, whether a trade is being carried on or not, can be relevant in other areas – consider a case earlier this year concerning a tax-avoidance scheme based upon film exploitation – Eclipse Film Partners LLP no 35 v HMRC.  The idea behind the scheme was that a syndicate of investors would borrow a substantial sum of money by way of loan and that these funds were to be used to acquire, for a very short period, the rights to distribute two films made by the Disney Corporation.  The rights would then be sold back again although if the films were very, very successful further profits might accrue.  The two films were called Enchanted and Underdog.

On 3 April 2007 the rights to the films were acquired for sums close to £790 million and then leased back again to Disney for £784 million.  The members had injected £50 million into the scheme but the bulk of the finance was provided by those diamond bankers – Barclays – on loan terms which would be repaid out of the proceeds, no member would be liable to pay any part of the loan back. As part of the agreement a substantial sum of interest was “prepaid” with the intention that the film partnership members should obtain interest relief to offset against their income for 2006/07 – in effect the £50 million they injected was to be turned into a tax deduction worth substantially more – but this could only work if the partnership was trading in the year in which the interest was paid in advance.  The Tribunal held that this was not an ‘adventure in the nature of trade’, merely a speculative investment and as a result the participants did not benefit from the interest relief they thought they could claim.  It was a business, but a ‘non-trade’ business.

So whether a trade is being carried on can be seen to be a quite complex issue – we don’t have time to examine each of the many badges of trade individually, but sometimes whether a trade is being carried on can lead to arguments not dissimilar to those of the middle ages when theologians would discuss the number of angels that could dance on the head of a pin!

A taxpayer might buy an asset, whether it is an Olympic Torch, a plot of land, a million toilet rolls or a commercial film and imagine on sale they have made a capital gain, in which case their CGT liability would be a maximum of 28% – it would be a nasty shock if HMRC successfully contend that it was an adventure in the nature of trade and they have an income tax and NIC liability at a rate which could be 52% or even higher!


Trusts and Main Residence Exemption

This podcast completes our look at the rather remarkable exemption for gains arising on the sale by taxpayers of a main residence – we started by examining the nature of the exemption and saw that in recent years a lot of investors have tried to claim the relief but failed to show that the property in question had ever been a residence.

In our last podcast we looked at the election that can be made by taxpayers who own more than one residence and we saw that with careful planning it is possible to use this election to maximise the exemptions available.  Remember though it is critical that that the election is made when available it is the key to allow the significant subsequent variations to be made.

The relief is contained in sections 222 and 223 of the Taxation of Chargeable Gains Act of 1992.  This month I’m going to look at the closely related relief that allows trustees to claim the relief where a beneficiary of the trust occupies a main residence owned by the trustees.  This also permits a considerable amount of tax planning.

First consider a practical example.  Alan bought the house, that he and his wife Anne live in, in 1986 and it has always been in his sole name.   He died in 2003 leaving his estate, including the house, to a trust established to hold the property during his wife’s lifetime which, when she dies, will be divided equally between their children.

In 2012 Anne needs to go into a care home and the trustees decide to sell the house to produce sufficient funds for this purpose.  As Anne does not own the property it is not possible to claim relief under s222 and if this further relief did not exist the gain would be chargeable and would reduce the amount available to buy Anne’s new accommodation.

Section 225 of the Act gives a relief to the trustees so that the gain arising on the sale of the house will be exempt just as if Anne had owned it directly.

The condition is that the dwelling-house has been the only or main residence of a person entitled to occupy it under the terms of the settlement.  The Trust must have been written in such a way to permit the beneficiary’s occupation but this can be a discretionary power – as was decided by the High Court in the case of Sansom & Or v Peay in 1976, sometimes called the Ridge Settlement Trustees case.

It is also possible for a s222(5) election to be made in respect of the property and this is important if the beneficiary has another residence which could also be their main residence – in fact it may be prudent for the trustees to ask the beneficiary to join in making the election in any event to guarantee the relief. Where made in respect of the trust property it must be signed both by the trustees and the beneficiary in question.

The relief is extended by s225A where a private residence is held by personal representatives of a deceased person who sell a house shortly after death to satisfy, for example, the requirements of a will or the payment of debts and the property is occupied by a legatee with a relevant interest accounting for more than 75% of the net proceeds after payment of liabilities, then the gain will also be exempt.

So far it all seems a very logical pair of reliefs but before 2003 many taxpayers had used these provisions to obtain a rather surprising relief.  Let’s suppose a house had been purchased as an investment many years previously and a very large gain had been made.  It was possible, until then, to set up at trust, transfer the property over into the trust and claim a relief called gift relief.  This relief was available to postpone the gain on transfer to the trust if there was a possibility of an Inheritance Tax Liability arising, provided that the value was within the IHT nil rate band, currently £325,000, the relief could be claimed but no tax would actually be payable.

Gift relief operated by reducing the value of the gift, the house,  by the amount of the gain arising at the date of the transfer into the trust and so if the trustees sold the property the final gain that they would make would be the same as if the property had not been put in the trust in the first place.  Here comes the twist – the trustees would then allow, under a discretionary power, one of the taxpayer’s children to occupy the property as THEIR main residence, they would then make the joint election and on sale the WHOLE of the gain would be exempted, not just the gain since the property was placed into the settlement!

From 10 December 2003 onwards trustees cannot claim main residence relief where gift relief had been claimed at any time in respect of the property – does this mean that trusts can no longer be used in main residence tax planning?

No – it doesn’t – the main residence relief is only lost if gift relief was also claimed.  If there is no need to claim gift relief there is then no problem with using a trust – let’s look at some practical examples:

Benny’s son Brad is about to enter his second year at university and must move out of halls of residence into privately rented property.  Benny decides to buy a house that Brad can live in and then, when he leaves university, can then be turned into a buy-to-let investment property.  Simply buying the house will not allow Benny to claim main residence relief as it is not his residence.  Suppose, on purchase, he transfers the property into a trust and allows Brad, under a discretionary power, to occupy it as his main residence, they jointly make the election.  Now on later sale the exemption will be available because gift relief had NOT claimed, and that will include the usual last three years of ownership in any event AND the letting exemption of £40,000 as well!  Provided that the cost of the house does not exceed the IHT threshold there will be no IHT to pay either.

Clearly interesting but here is another – until 1988 every taxpayer could claim a second exempt residence if it was occupied rent free by a dependent relative – today that relief only continues whilst the house is still being occupied by the same dependent relative who occupied in before 1988.

Charles’s mother is 88 and she needs to enter sheltered accommodation which Charles buys and allows her to live in it – on sale, after her death, the gain will be fully chargeable.  However Charles could, like Benny, transfer the property into a trust, allowing his mother to occupy it as a beneficiary and on sale the gain will be fully exempt.  Theoretically there is no limit to the number of dependent relatives that could be housed in this way – except for Inheritance Tax of course.  However if the intended beneficiary can be shown to be disabled the gift into the trust will not trigger a lifetime liability but it will be counted as part of the estate of the disabled person when they die.

Here is another practical example… Danielle obtained a divorce from her husband Dick and the court made an order that she be allowed to live in the property until their children reached the age of majority at which time it should be sold and the proceeds divided between them.  Danielle’s half of the gain will be exempt as it is her main residence but Dick’s share of the gain on sale is unlikely to be covered by the exemption.  There is an extra statutory concession which would allow him to claim the gain as exempt but only if he has no other main residence, and this is not very likely.  However, where the court orders this to be done it is called a Mesher Order and is treated as though a trust arose and as a result of that Dick’s gain will not be chargeable.

Suppose, seeking to avoid unnecessary legal expenses, Danielle and Dick do not obtain a court order?  The gain will be chargeable unless – and you guessed it, unless a trust is used.  Furthermore, as long as this is reasonable provision for Danielle it will not be chargeable when the trust is set up as there is an IHT exemption for settlements made between persons who are, or who have been married – the house here could be valued in the millions and the relief would still be available!

I think we can now see how trusts can be used in connection with property to further maximise our exempt gains but there is a ticking time-bomb here which the unwary may not realise could catch them out.

Suppose Ernie had purchased a property as an investment in 1990 and then in 1999 needed a property to house an elderly dependent relative, Aunt Ethel.  He set up a trust, made Ethel a beneficiary and claimed gift relief which, at the time, was perfectly normal tax planning as outlined above.  However – having claimed gift relief – the main residence relief stops on 10 December 2003 and if that house were to be sold now the gain from 2003 onwards would be chargeable with no last three years and no letting exemption either.  I wonder how many taxpayers realised in 2003 when the relief was taken away that they could lose it by having claimed another relief many, many years previously?

Another example – Fred, a single man in his 60’s lived with and looked after his elderly parents so that his two younger sisters did not have to.  After the death of the parents, who left their estates to be divided equally between the three children, the sisters allowed Fred to continue to live in the property for the next 5 years until he died.  The house was then sold and a substantial gain arose.  The valuer acting on behalf of the executors when Fred’s parents died negotiated a reduced value because Fred was living in it, although not as a tenant with rights of occupation.

Fred’s third of the gain on sale will be exempt and the sisters will be fully chargeable unless…

Unless they executed a deed of variation within two years of the death of the second spouse which altered that person’s will to create a trust for the benefit of the three allowing any one or more of them to occupy the property.  Now Fred’s occupation satisfies the condition and the whole of the gain will be exempt, not just the third that relates to him personally – it will also not alter the IHT payable which would be the same whether the estate was left directly or in trust.

This is a fantastically flexible relief which, if used properly, can save many, many thousands of pounds of CGT liabilities.  Equally if the appropriate conditions are not satisfied the revenue can, of course, deny the relief.  Anyone planning to use the relief should include, in their tax returns, a full explanation of what is being done and it’s commercial reasons to protect the taxpayer from the possibility of discovery assessments in later years if the revenue decide to disagree.

Bear in mind that there will be legal expenses, especially in setting up appropriately worded trusts as discussed here, you may also find that local family solicitors are reluctant to set up these devices.  Once established the running costs should be very low and a tax return only required when the property is sold unless other income arises to the trustees.

This podcast was presented, written and produced by Paul Soper who asserts copyright therein.  The full text of the podcast can be read at my site

For further details of podcast production, particularly if you would like me to create them for you, contact me at Paulsoper, all one word, at mac dot com.

ESC C16 & BVC 17

Hello – I’m Paul Soper and this is an extra edition in the series of Podcasts as usual intended primarily for practitioners – especially small practitioners, but, as ever, if you are a reasonably financially literate taxpayer or an accounting student you should enjoy it too – if enjoy is the right word! You can read the text of this podcast at my website http://www.Taxationpodcasts all one

There has been a considerable amount of confusion in the last couple of weeks over changes to two Extra-statutory Concessions – one, BVC17 being withdrawn, and the other ESC C16 being translated into legislation with significant new restrictions being attached.  The concessions came from different government departments and as they are both concerned with the same basic situation it is probably not surprising that this confusion has occurred.

First of all here are a couple of examples of situations where the concessions might be relevant.

John is a computer consultant and has worked for the last 10 years through a company.  He now wishes to retire.  The Company has two £1 shares in issue, both owned by John.  The company has accumulated reserves amounting to £55,000 and all outstanding debts have now been paid.

Fred has a small technology company which he started 10 years ago with a friend, and he has recently accepted a very well paid offer to work for a multinational, one of the conditions of which is that he works exclusively for them.  He wants, with the consent of his friend, to extract the reserves that he has built up in the company, currently amounting to £140,000 in total.  There are 10,000 £1 shares in issue, 8,000 owned by John and 2,000 by the friend. No claim had been made under the Enterprise Investment scheme.

Both John and Fred could appoint a liquidator to bring their companies to an end, and the sums that they extract will be treated as part-disposals from a Capital Gains Tax perspective, both will be entitled to Entrepreneurs’ Relief and these gains will be chargeable at 10%.  The problem is that liquidation does not come cheap – the liquidator assumes a personal liability in the winding up and so must make quite detailed investigations before distributing what is left.  In recent years government estimates of the cost of a straightforward liquidation have been made in the region of £4,000 to £7,500.

But there is an alternative course of action that John and Fred could have used to get the money out of their companies – it is called ESC C16 and is a revenue concession, at the moment, which recognises the cost of liquidation and allows the taxpayer who applies for the relief, provided they give certain assurances to the revenue, to pay a dividend, which would normally be taxable as income, but treat it instead as though it was a liquidators’ distribution which would only be subject to CGT at the Entrepreneurs’ relief rate of 10%.

They have to assure the revenue, amongst other things, that the company is ceasing to trade and will not carry on a business in future, that all outstanding debts have been or will be paid, that the information required by the revenue to determine the outstanding corporation tax liability will be provided and that the shareholders will accept the CGT liability.  Increasingly HMRC have also been asking for assurances that the trade is not going to continue inside another company or group.  Oh – and one more thing – the company must allow itself or present itself to be struck off by the Registrar of Companies under (in the words of the concession) section 652 or 652A of the Companies Act of 1986.

The most recent company legislation is found in the Companies Act of 2006, this became fully operational in late 2008, and the equivalent provisions are sections 1000 and 1003 of this later Act.  The published revenue concession has not been updated for the change in statutory references.

So both John and Fred could use this mechanism, even though Fred’s company has considerably more to distribute, but there is one fly in the ointment.  For John it is not very important as there are only two shares in issue but for Fred it is more of a problem.  C16 depends on the payment of a dividend, and a dividend cannot legally exceed the distributable reserves of the two companies, in John’s case this will leave £2 inside the company, hardly a concern, but in Fred’s case £10,000 – share capital in a limited company is not distributable.  To get this out would have required a formal liquidation – that is until October of 2011.

First let’s consider what would have happened before October to Fred’s money.  He could have walked away from the company leaving £10,000 inside it and it would then have become the property of the Crown under the Bona Vacantia principle, Bona Vacantia is also the name of a department of the Treasury Solicitor’s Office which deals with ownerless property.

Fred could have paid a dividend of the whole of the company’s reserves including the share capital but the excess of £10,000 would have been an illegal dividend and the same Bona Vacantia department would have the right to pursue Fred and his friend for that money on behalf of the Crown.

A couple of years ago the Bona Vacantia department tried to help out by reaching an agreement with the accounting bodies that an amount not exceeding the cost of a straightforward liquidation, which they estimated at £4,000, could be extracted and they would not pursue the Crown’s rights if the company had permission under ESC C16.  This was contained in an extra statutory concession document called BVC17 and available on their website.

At the time they also pointed out that as a result of the Companies Act 2006 there were other courses of action open which would avoid the problem anyway.

Fred couldn’t use BVC17 because his sum exceeded £4,000 but he could make a declaration of solvency under the 2006 Act and reduce his share capital to a figure of less than £4,000 and then apply for C16 approval.  He could apply to have his company reregistered as an unlimited company in which case all of it’s reserves would become distributable – non-distributability is the price paid for limited liability.

Even if he had, in error, walked away from the company and had allowed it to be struck off the 2006 Act allows a company to be resurrected within 6 years (previously 12 months only) and so put this right and legally extract the money.

Bona Vacantia clearly then thought long and hard about the ease with which a legal distribution could be engineered and in October 2011 announced that they were withdrawing the concession BVC17 with immediate effect because it was no longer necessary – as they made clear in a frequently-asked-questions section of their website they were no longer going to pursue these sums on behalf of the Crown regardless of the amount involved, £4,000 or £4,000,000 it didn’t matter.  So good news for Fred.

However the revenue were also thinking about their concession C16 and the necessity to make it a legislative provision because of a House Of Lords decision in the Wilkinson case suggesting that these concessions were not within the revenue’s power except in cases where they had care or management of the tax system.  Recently the Supreme Court have ameliorated this ruling in the Gaines-Cooper case and indicated that concessions can be made if they increase the potential sums accruing to the exchequer.

In December of 2010 HMRC announced that a number of concessions would be made law including C16, however they designed the legislation so that the amount that could be extracted in this way would be limited to £4,000 – coincidentally the same as the BVC17 limit.

Implementation of this was then postponed because of objections made which required reconsideration but on 6 December 2011, at the same time as they released draft legislation for inclusion in Finance Bill 2012, the revenue announced that the legislation of C16 would go ahead but with a limit of £25,000 rather than £4,000 and this would take effect from 1 March 2012 – it was to be introduced by delegated legislation under powers conferred on them a couple of years ago.  If the distribution exceeded £25,000 the WHOLE amount would now be taxed as income not gain.

Now this will cause problems for both John and Fred.  John’s problem is greater than Fred’s because he has less money locked up inside his company and this is the patently unfair aspect of the proposal, it affects smaller taxpayers proportionately greater than it does taxpayers with greater sums to extract.

If John goes ahead after 1 March and extracts the whole of the amount available as a distribution he will be liable to income tax, not CGT at all.  To the extent that he is a basic rate taxpayer this is an advantage as the dividend will carry a tax credit which will extinguish his basic rate tax liability.  However, to the extent that he is a higher rate taxpayer, he will be liable to income tax at a rate of effectively 25% on the amount extracted – a 15% surcharge on top of the CGT liability which would have been further reduced by his annual CGT exemption of £10,600.  He could pay an initial dividend sufficient to bring his reserves down to £25,000 and then proceed using the new rules, but that would still be a 15% surcharge on £30,000 worth of reserves – a cost of £4,500.

In the document explaining what they proposed to do HMRC comment that they believe the cost of a straightforward liquidation to be £7,500 so John would not have the luxury of using a liquidator to extract his money as capital because it would be even more expensive.  If Bona Vacantia are right and the cost is closer to £4,000 (or even less as some commentators have suggested) he is still being required to incur a cost which before March 2012 he would not be required to bear at all.

Fred on the other hand has a much larger sum to deal with but although he is better placed to afford the services of a liquidator he will still be suffering additional expense which before March 2012 he would also not be required to incur but the effect on him is less.

Normally when HMRC legislate for concessions they undertake that the effect of the legislation is not to change the rules and when the draft legislation was put before parliament a year ago that is exactly what parliament was told – but that is clearly not the case.

 This is a fundamental change, and one that affects less well-off taxpayers to a greater extent than richer ones – this cannot be fair can it?

What’s the rationale behind the change?  HMRC claim that C16 was being used for avoidance or even evasion purposes – but a much greater problem according to Richard Murphy of Tax Research UK is companies being struck off without having made any returns or approaches to HMRC at all, a problem he estimates to be costing the Treasury BILLIONS!

HMRC will have the advantage of making this a self-assessment procedure as they will no longer have to consider applications under C16 but surely this will simply lead to more disgruntled taxpayers presenting empty shell companies for striking off and simply walking off with the cash without having paid either CGT or income tax on the distribution?

It is not too late to affect this proposal, write to the revenue pointing out how unfair this is for less well-off taxpayers, write to your MP who may object to the statutory instrument so that parliament has to debate the proposal, register your disapproval using my online petition at – if you make your voice heard it may do some good, if you do not many of your smaller clients will be adversely affected by this proposal when they retire or cease trading.

Is there a solution?  Surely, other than abandoning the proposal, which is not realistic, raising the limit to a point at which the tax surcharge equated with cost of liquidation would be a first step – if the cost of liquidating is £7,500 then that would equal reserves of £75,000 not £25,000, perhaps increasing it to say £100,000 would allow a little extra advantage.

It cannot be to the revenue’s advantage in the long run to encourage yet more taxpayers to extract money and avoid all liability on it because the alternative is to deny them the benefit of a relief, entrepreneurs’ relief, which parliament has already decided should apply to taxpayers with lifetime gains of up to £10million.

This podcast was presented, written and produced by Paul Soper who asserts copyright therein.  The full text of the podcast can be read at my site For further details of podcast production, particularly if you would like me to create them for you, contact me at Paulsoper, all one word, at mac dot com.

My next podcast, available next week, continues the examination of the Main Residence Exemption available for home-owners and some, I stress some, landlords.

CGT and the Main Residence Election

Hello – I’m Paul Soper and this is the November 2011 edition in the series of Podcasts focussing on recent developments in Direct Taxation in the UK intended primarily for practitioners – especially small practitioners.  But if you are a reasonably financially literate taxpayer or an accounting student you might enjoy it too – if enjoy is the right word!

You can read the text of this podcast at my website http://www.Taxationpodcasts all one

In the last couple of years there have been lots of Tribunal cases concerning the Capital Gains Tax main residence exemption – often being claimed by speculators or buy-to-let landlords trying to claim this enormously valuable exemption on rather shaky grounds.

For taxpayers generally the house they live in if owned or rented on a longer lease is the most costly investment asset they will buy in their lifetime and in most cases on disposal it will be completely exempt from CGT – but larger properties may be partly liable and, if let, there is a second valuable exemption that can be claimed as well.

This is the first of two podcasts where I am going to focus on aspects of this incredibly important exemption, first of all focussing on these recent cases by buy-to-let owners and speculators.  In the second podcast, next month, I’m going to look at a valuable election which anyone who acquires a second or subsequent home should think about making.

How does the basic exemption work?  Note it is not the property which is exempt, it is that part of the gain that relates to a period of exempt occupation which is exempted.

If they did not occupy it as their residence for the whole of the period of ownership the gain exempt is found by time-apportionment of the total gain, although certain periods are exempt in any event, or exempt by concession.  The most significant of these is the last three years of ownership in any event.

If a taxpayer owned a house for 10 years, and for the last five years had let the property, having moved into another larger house, this means that 8 years in total will be exempt out of the 10 years of ownership, five of actual residence plus the last three years, and so 80% of the gain will fall out of account under this relief.

Unfortunately the legislation, which is found in the Taxation of Chargeable Gains Act, dating back to 1992 is far from clear.  When CGT was first created in 1965 there were many defects in the structure of the act and when it was consolidated in 1992 no one tried to correct the problems that poor drafting can bring.  The Act talks about disposals, without defining what a disposal is, by a vendor, without defining who a vendor is, giving rise to a gain, well at least we know how to calculate that (maybe not) and allowing exemptions for businesses (without defining a business) and residences – you’ve guessed it, without defining what residence is.  The legislators thought that all of these terms were so obvious that they did not need a technical definition but over the years case after case exposes the problems that a lack of clear definition can bring.

The basic exemption for the family home is contained in section 222 of the Act, headed “Relief on disposal of private residence” and is actually in two parts.  It exempts “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 (which here means and/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 – this is defined as being an area, inclusive of the site of the dwelling house, of half a hectare, roughly 1.2 acres.

It is two separate reliefs which means that if the house is sold first, the grounds are retained and then sold later the house will be exempt but on disposal the grounds will then be chargeable.

However if the land is sold at the same time as the house, or the grounds are sold first, then the gain will be exempt.  It is important to get this in the right order.

It is possible for an area larger than half a hectare to qualify if ‘the area required for the reasonable enjoyment of the dwelling house’, having regard to it’s size and character, is greater than half a hectare.

A Mr and Mrs Henke sold two houses with individual grounds of 0.54 acres each out of a total area of 2.66 acres – the land sold could not be required for the enjoyment of the property as they were able to sell it!  They had also owned the land for some years before erecting their own house and this could not be exempt until that first house on the plot had been built.

If you are building or acquiring a property the revenue will, by concession, also exempt a period of up to 12 months when the newly acquired property was unavailable because of building works or alterations being carried on.

Mr Longson tried to claim an area of 18.68 acres  on the grounds that he owned horses and rode them on the land.  Given the size of the house the revenue had been prepared to grant relief on 2.61 acres – this was upheld by both the Special Commissioners and the High Court where Judge Evans-Lombe observed “it is not objectively required, ie necessary, to keep horses at a house in order to enjoy it as a residence.”

There is also a relief, referred to as a letting exemption, where the gain arises in respect of property which has been the taxpayer’s only or main residence at any time during the period of ownership and the dwelling house, or any part of it is or has been at any time wholly or partly let as residential accommodation.  This was a measure introduced in the 1970’s originally to encourage people to let empty property and empty rooms that they owned.  The relief is limited to the smallest of three figures – these are – the amount that is exempt as a residence gain, the amount of the gain which relates to the letting, and a maximum of £40,000.  For a husband and wife this means a maximum of £80,000 if the house is jointly owned, as it often will be!

In our earlier example, a property owned for 10 years was 80% exempt but the remaining 20% of the gain will be subject to this further £40,000 exemption.  So it is no surprise that ‘buy-to-let” landlords are attracted to the idea of claiming that they had, at some time, resided in the property as their main residence, in order to benefit from the exemption for the last three years and the further £40,000 of letting exemption.

But what is a residence?

How long do you have to live in a property for it to be considered to be a residence?

Can a buy-to-let landlord also get the main residence exemptions?

And what happens if you have more than one residence?

A residence is, according to the dictionary – a person’s home; the place where someone lives – by itself this suggests at least some degree of permanence, and of course the concept of residence is also encountered in a taxation sense when considering whether a person is resident in the UK – and from those cases there is also the suggestion that it is not just where one sleeps, but where one’s home is.

For the vast majority of taxpayers it is self-evident where they reside and, indeed, may have resided for many, many years.  This is recognised in the legislation which, in addition to the last three years of ownership also permits a further absence or absences from the home, the residence, of up to three years for any reason, permits an absence of up to four years where the individual works in an office or employment elsewhere in the UK or is self employed elsewhere in the UK which reasonably requires him or her to be absent from their residence to be able to perform the duties, and also permits any period of absence where a person has an office or employment outside the UK – note self employment is not a reason for this absence.

Now the word to stress here is absence, and absence implies return.  If a person leaves their residence to work elsewhere in the United Kingdom, but sells the property without having returned to live in it they would not normally be able to take advantage of these further exempt periods.  By concession, however, where the duties of employment prevented a person from returning to occupy the property before sale the relief can still be given.  Unfortunately this does not permit the taxpayer to build up a property empire as the legislation also states that these periods of absence only qualify if you have no other place of residence which could qualify as a main residence.

So – if called to work elsewhere in the UK and you stay in hotels, boarding houses, or rented accommodation that you do not own or have a longer leasehold interest in, the further reliefs can be claimed.  But if it is cheaper to buy a house than rent whilst you are away then these further periods of absence cannot qualify.

In a recent case a Mr Moore and his partner, a Miss Archer, bought a property in December 1999, originally intending to live it, she took a dislike to the property and sold her interest in the property to him and he then sold it in 2004.  On the evidence presented to the tribunal it never became his residence even though allegedly he had stayed in the property whilst carrying out improvements.

A taxpayer called Springthorpe acquired a house, renovated it and claimed to live in it whilst this was being done, but then moved into another house with his new partner and let the former property to students.  Again there was no real evidence that he occupied the property as his residence at this time, his post was addressed to his partner’s property, the utility bills during this period averaged £1.90 per week and although an estate agent confirmed that he had been sleeping in the property – “remember the state of your bedroom… covered in pieces of stripped wallpaper… I commented that in the morning you must look like a paper mache man – there wasn’t an item of clothing or bed-linen unaffected by the mess.”

The Revenue obtained information that during this period no council tax had been paid as the local authority regarded it as uninhabitable.  The Tribunal accepted that Springthorpe stayed overnight in the property but that there was no evidence that it had become his residence.

So – how long do you need to live in a property for it to be regarded as your residence? –

Since 1998 the leading case on this topic is Goodwin v Curtis where a man, in the process of selling another property which was accepted as having been his main residence as part of his marriage breaking down had moved into a farmhouse that he had recently acquired from a company he controlled and which he had already placed on the market.  He moved into it and stayed there for 32 days, a little under 5 weeks – the commissioners rejected this and found that he had not intended to occupy it as his permanent residence and this was upheld, on appeal, by the Court of Appeal.  So living in a property for five weeks is probably not enough.

Mr Favell, in a 2010 case, had intended to acquire a house for his son, although did not transfer it to his son until some four years had elapsed when a gain arose on disposal.  Favell claimed that he had lived in the property for a period of 11 months when separated from his partner.  The revenue were able to show that throughout this period it was his son who was shown in Council Tax records as the occupant and had claimed a 25% reduction as the sole occupant, meanwhile housing benefit had been paid to Favell at his partner’s residence and also to a person who was a tenant in the property sold at the time that Favell claimed he lived it.  There was no evidence that he had moved to the property although the Tribunal ruled that had there been evidence of residence the period of 11 months would have been sufficient to make it a main residence.  So – five weeks is not enough but 11 months certainly is.

In another case at this time a Mr Metcalfe owned three properties, claimed that he moved into one in November 2002, although it was furnished he did not install a phone, did not have a TV license as the TV there ‘did not work’, he sold it four months later, and during that period the only outgoing was for electricity of £39.09 – almost all of it a standing charge. The tribunal ruled the evidence fell short of establishing that it had been his residence and there was no indication of permanence.  Note that the legislation does not, itself, require a degree of permanence, but this factor is regarded, by the courts, as implicit in the concept of residence.

In the most recent case, reported a couple of months ago, a Mr Lowrie had bought a property intending to construct two houses on the site, having obtained planning permission in early 2003.  He bought the property in May 2003, installed his household goods there in June 2003, but lost interest in the property because of his sister’s death in Wales.  The property was advertised for sale with vacant possession in December 2003 and sold on 20 January 2004.  On his own admission he spent most of his time with his sister’s family in Wales.  The revenue quoted the following from the judgment in Curtis v Goodwin that I referred to previously – “the principle is that in order to qualify for the relief a taxpayer must provide evidence that his residence at a property showed some degree of permanence, some degree of continuity or some expectation of continuity.”

Can you occupy a property as a residence without living in it?  Occupy is a legal term which is concerned with rights over property to enter into it.  A Ms Bradley claimed that a house her father gifted to her in 1998 in Preston, Lancashire,was occupied by her as a residence even though she never stayed in it as she went to university in Leeds, Yorkshire, the other side of the Pennines.  After qualifying she took a job as a Newly Qualified Teacher in the Leeds area and then sold the house in Preston.  It had been occupied during term-time, by students.  She had never stayed in it, even when it was vacant during vacations. Ownership, by itself, is not sufficient to establish a property as a residence.

What if you own more than one residence at the same time? (Fanfare) – our own dear Queen has some nine different residences which she, or members of her household occupy, at the same time, from Buckingham Palace and Windsor Castle through to Holyroodhouse in Edinburgh, Balmoral in Aberdeen, and Sandringham in Norfolk where the Royal Family spend each Xmas.

If you have more than one residence there are two ways of exempting them – either claim that you live in job-related living accommodation which is a residence provided to you by your employer, in which case another house can be owned and exempted so long as you merely intend at some future time to occupy it.  Ms Bradley had also tried to claim this but her accommodation as an NQT was not provided by her employer and so the house in Preston could not be exempt under this provision.

In my next podcast in December I am going to look in greater detail at this valuable election where taxpayers do own more than one property which is often overlooked but which may be incredibly valuable if used in the right way.

This podcast was presented, written and produced by Paul Soper who asserts copyright therein.  The full text of the podcast can be read at my site

For further details of podcast production, particularly if you would like me to create them for you, contact me at Paulsoper, all one word, at mac dot com.

Until next month…