In Wagstaff & Wagstaff v HMRC [2014] TC03183, the First Tier Tribunal (FTT) held that a ‘granny flat’ (the Flat) owned by a couple, which was subject to an agreement allowing a relative to live there for life (or until remarriage), was eligible for Capital Gains Tax (CGT) Private Residence Relief (PRR).
The facts
- The Flat was purchased by Mr Wagstaff’s mother (“Mrs Wagstaff”) in 1990 and, in 1996, was sold to the taxpayers at a market value.
- The Flat did not form part of the taxpayers' own property.
- The sale of the Flat was covered by an agreement (“the Agreement”) between the parties, under which Mrs Wagstaff was entitled to live at the Flat at no cost for the rest of her life or until her remarriage, subject to a payment of £5,000.
- In 2005, she had an accident and ended up living with the taxpayers until suitable long term accommodation was found. During this time, the Flat was still available to her.
- In 2006, she agreed to move into a better house, in which she lived on the same terms as the Agreement.
- The Flat then remained empty until it was sold in 2007 (to a third party) with her full permission.
The FTT held that the taxpayers clearly understood that the Agreement meant that they had, among other things, given up the right to let or sell the Flat without Mrs Wagstaff’s permission. However, the Agreement made no reference to a trust.
The law
A chargeable gain arising on the sale of a dwelling house, which a person has occupied as their only or main private residence, is not a chargeable gain for CGT purposes under PRR. This relief is extended to “settled property” under a trust, see CGT Private Residence Relief: settled property & granny flats.
The decision
The FTT held that in acquiring the Flat on terms that included the Agreement, the taxpayers had taken on the role of trustees.
- Their interest in the Flat was “settled property” and the Agreement created a trust, despite not referring to the existence of one.
- The parties intended the Agreement to set out legal rights and obligations regulating their relationship during Mrs Wagstaff’s lifetime: this was the only basis on which she was prepared to part with ownership of the Flat.
- Mrs Wagstaff had effectively placed herself in the hands of her son and daughter-in-law, but only if they accepted particular legal obligations towards her.
- Her position in connection with the Flat was to be secure against any eventuality and better protected if the taxpayers accepted obligations usually associated with a trust and the role of trustee, as set out in the Agreement.
As a result, PRR was available to them.
Commentary
A useful way of avoiding CGT on the disposal of a granny flat. The alternative relief: dependent relative relief only applies if a house is occupied by a dependent before 6 April 1988. As the years roll by there are fewer cases for that to apply. What was of interest is that the Wagstaffs did not know they were creating a trust. In this situation they might also be mindful of the Inheritance Tax implications of this type of arrangement.
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