PRR: Extended permitted area and a shed

In Mr William & Mrs Hazel Ritchie [2017] TC05911, a shed and land in excess of the 0.5ha permitted area were held to be part of the curtilage to a property for Capital Gains Tax (CGT) Private Residence Relief (PRR). 

This decision Was overturned by the Upper Tribunal. HMRC were out of time for an extended discovery assessment. HMRC had appealed the PRR calculation however this was not heard further.

• In 1987, the Ritchies acquired a disused railway station and associated land, including two sheds, totalling 0.65-0.7ha. They rented a neighbouring house.
• The larger shed was used as a garage, holding the family car, children’s garden toys and the plough used for Mr Ritchie’s hobby.
• In 1992 they built a house on the land and in 1995 moved in.
• The Ritchies sold their house, other buildings and land to a developer for £2 million in January 2007 (each holding 50%).
• They sought specialist professional advice and this was given verbally by an ex-tax inspector. They claimed CGT Private Residence Relief (PRR) and excluded the disposal from their Self Assessment returns.
• In 2010 HMRC enquired into the sources of capital introduced to the couple's new business and was informed it was from the sale of their property (this enquiry was closed without amendment).
• HMRC then noted that the grounds exceeded the PRR permitted area of 0.5ha and, on 12 March 2013, raised Discovery assessments on the basis that PRR did not apply to the whole disposal and specifically excluded the larger shed.
• On 27 March 2013 further discovery assessments were raised due to the eight-year delay between land purchase and occupation of the house.
• Neither assessment advised the Ritchies of the need to show carelessness or that they could appeal on these grounds.
• HMRC contended that the exclusion of the disposal from the Ritchies’ returns was careless, thus justifying the late discovery.
• The District Valuer decided that the additional land was not required for the enjoyment of the property.
• No one appeared to support the taxpayer’s report on the permitted area.

The taxpayers appealed against the discovery assessments.

In evidence, Mrs Ritchie told the tribunal that her husband had three priorities in life: number 1, the shed; number 2, her and number 3, their children.

The FTT held that the larger shed was part of the curtilage of the property (so qualified for PRR). There was some debate on how this gain should be arrived at. It recalculated the gain (see breakdown below this article).

• As the shed was required, the land to get the shed must also be required effectively giving a permitted area of 0.6ha.
• The gain attributable to the excess should be calculated on a proportional basis as the purchaser, being a developer, did not distinguish in different values between the different parts of the site. 
• The period prior to occupation could not qualify for PRR  However, due to the change in the nature of the property (when the house was built) the legislation does not require an apportionment on a strict time basis. The FTT decided that only a small amount of the gain would be attributable to the earlier period, as the land was less valuable without the house.

Was there a valid discovery?

• The FTT held that the Ritchies took reasonable care, however, their specialist did not ask about the period prior to occupation and this was careless.
• The accountant was also careless because:
  • He did not accompany Mr Ritchie to meet the specialist.
  • He did not brief the specialist to ensure he knew there was a preoccupation period.
  • He did not attempt to verify with the specialist what was said he simply took Mr Ritchie’s word for it.
  • He should have done some research himself and have been aware of the comments on the return about PRR.
• Hence, the carelessness requirement for the extended discovery deadline was met.

The FTT further held that the first discovery assessment was unlawful as they could not justify how the amount could have been calculated. The overall tax position was considered to revise the second assessment.

Comment

There were also a few interesting procedural points regarding the tribunal itself, which are recorded

• As the case was in Northern Ireland, the Valuation Office Agency was not involved. Instead, the 'District Valuer' came from the Land and Property Services Directorate of the Department of Finance and Personnel.
• The taxpayer applied for the District Valuer to be excluded from the tribunal while the Inspector gave her evidence and was cross-examined; this application was granted.
• Alternative Dispute Resolution (ADR) had been tried and failed. The documents relating to this included 'prejudicial material' that the taxpayer successfully applied to have excluded. It was noted that one of the members of the tribunal did not read the material as he had not realised it was included in the original documents provided.
• The FTT did not agree to exclude HMRC from proceedings (due to the prejudicial material).

As noted above, there are a number of interesting elements to this case and it is well worth reading the detail of the judgement.

Of particular interest to taxpayers will be the reasoning over the shed and land and to advisers, the FTT’s comments on carelessness/negligence.

Useful guides on this topic

PRR: Private Residence Relief
What is Private Residence relief (PRR)? What are the qualifying conditions? Can you claim relief on two homes? How do you claim PRR? Can you claim PRR if you develop your garden?

Garden: Selling or developing
What are the tax consequences of selling a garden for development purposes? What if the owner develops the garden? 

How to appeal an HMRC decision
Disagree with an HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

How to appeal a tax penalty
What are the steps in making an appeal? What should your appeal cover? What does recent case law say on this topic?

Discovery Assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences?

Penalties: Errors in Returns and Documents
What penalties apply if you make an error or mistake? How are penalties calculated? How do you check penalties? What can you do if you receive a penalty?

DOTAS: Disclosure of Tax Avoidance Schemes
What are the Disclosure of tax avoidance schemes (DOTAS) rules? When should you disclose your use of a tax avoidance scheme? What are the consequences of non-disclosure? How are penalties calculated?

External links

Case Mr William & Mrs Hazel Ritchie [2017] TC05911

Breakdown of gain calculations by FTT

Comments:

• Then indexation and taper relief.
• There is an error in the judgement: the proceeds allocated to the permitted area are 5/7 not 6/7 – but this should not alter the final result.
• The pre-occupation gain should probably be apportioned between permitted and non-permitted area as well.