Is it a home for tax purposes?

Trusts Discussion
1

My client has self built a house and lived in it for the last few years. It’s his only property.However it was never passed by building inspectors and doesn’t have the habitation certificate. He does think it has a value (obviously to someone who would finish it off)

Questions!

  1. If he sold it made a profit would it be subject to CGT - it’s his only property.

  2. If he doesn’t sell it but dies, could RNRB be claimed?

I also have a further Q - related to same client.

  1. He doesn’t have kids but does have a nephew for whom he was legal guardian while nephew was ward of court. I understand this qualifies as a direct descendant for the RNRB rules . But if he gives to nephew’s sons is that then still a “direct descendant”? Obviously this may be irrelevant given the answer to (2) above

Thank you !

2

No direct experience of this situation but for what it’s worth:

  1. I’m not sure that even if the law is broken (eg if there is habitation in the house irrespective of a lack of approval by the building inspector) that this precludes PPRR if the usual PPRR conditions are satisfied. Not quite the same, but income tax is leviable on a trader’s illegal profits.

  2. Assuming inheritance by a lineal descendant on death then RNRB should apply. As legal guardian of nephew the latter is a lineal descendant (IHTA 1984 s 8K(6).

  3. Yes. IHTA 1984 s8K(6) and 8K(8).

Malcolm Finney

3

Hello Nicola,

IHTA legislation refers to TCGA 1992 for the definition of “dwelling” - “dwelling” has [F923 the same meaning as it has for the purposes of Schedule 1B to the 1992 Act;] - The Finance Act which then refers to TCGA 1992.

The legalisation is drafted so ‘part completed’ and ‘off-plan’ could not be sold with limited CGT implications. The plus side is these types of property qualify under IHT legislation. You can claim the RNRB on land with planning permission.! [subject to the RNRB rules]

Dwelling: basic meaning

5(1) For the purposes of this Schedule a building is a dwelling at any time when—

(a) it is used, or suitable for use, as a dwelling, or

(b) it is in the process of being constructed or adapted for use as a dwelling, and, in each case, it is not an institutional building.

(2) Land that at any time is, or is intended to be, occupied or enjoyed with a dwelling as a garden or grounds (including any building or structure) is taken to be part of the dwelling at that time.

Richard C. Bishop
PFEP

4

Thank you. Good news all round for him it seems!

1 Like
5

Thank you very much. I had hoped to give him a positive response and it seems I’m able to!

1 Like
6

I am sorry to be a pedant but in that respect my pathology is derived from a long study of the opinions of HM judges who suffer from the same disability. Definitions are phenomenally important in tax statutes.

1 IHT RNRB

“Dwelling-house” is not defined in s 8H IHTA 1984. It does not import the definition from TCGA 1992 or any other Act. There is a very limited importation is subsection(7) of the meaning of “job-related” to determine whether it can be considered a residence. It is therefore to be interpreted as an ordinary English word, and may have been interpreted as such in context in other Acts, fiscal or otherwise. This is not wonderful news as this cavalier decision not to elaborate in more detail on its meaning has caused much unnecessary trouble in relation to SDLT.

2 CGT PPRR

“Dwelling-house” is not defined either in s222 TCGA 1992, confirmed as HMRC’s view in CG64230. HMRC do accept that the term is not restricted to houses as such: CG64305, 64309 and 64325.

The word “dwelling” in para 5 Sch 1B TCGA is defined but has nothing to do with s222: it applies to determine whether or not a person has made a “disposal of residential property” for the purposes of applying the appropriate rate of CGT to the gain arising: s1H(2)(a).

That definition states that a building is a dwelling “for the purposes of this Schedule” if

(a)it is used, or suitable for use, as a dwelling, or

(b)

it is in the process of being constructed or adapted for use as a dwelling

It could not be clearer that it is not intended to interpret wording in s222. It is open to a Court, of course, to decide that “dwelling-house” has that meaning but not by applying Schedule 1B.

3 SDLT

An important component for rate of charge is the definition of “residential property” which includes “a building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use” s116 FA 2003. For the purposes of multiple dwellings relief a “dwelling” means a building or part of a building which is used or is suitable for use as a single dwelling or is in the process of being constructed or adapted for such use": Sch 6B. The same definition is employed for higher rate transactions in Sch4A and first time buyer’s relief in Sch6ZA. Note that HMRC consider a building “would need to be suitable for an occupant generally, not just for a particular type of occupant like a relative or a squatter”: SDLTM000415. However the definition is in the alternative: used OR suitable to be used which must encompass actually used although unsuitable.

These definitions cannot be implied into IHT and CGT though they too are not further defined and have their meanings in context as ordinary English words. It seems at least open to argument that, in the absence of these specific wider definitions, the words “dwelling-house” or “dwelling” would ordinarily exclude buildings not suitable for relevant use or under construction/adaptation but the contrary argument is that they are inserted, where they do appear, solely for the avoidance of doubt.

The lamentable failure of the legislature to define “dwelling” for SDLT led to myriad Tribunal decisions about granny annexes, staff quarters, and other varieties of supposed separate and multiple dwellings for MDR, exacerbated by scheme sales merchants predating possible refunds, nearly all claims for which failed. Guidance in SDLTM00410-00430 was published in October 2019 but had been asserted over many prior years in correspondence as HMRC’s view and should have been published as soon as it became settled, and even better legislated from 2003 in the definition. MDR is to be repealed after of 31 May 2024 but HMRC will still cavil about garden and grounds, when and if an incomplete building is “suitable” SDLTM00385, and whether land is residential or not or mixed.

4 The original query

I tend to agree with Malcolm that the legal niceties would not necessarily prevent an incomplete building from being a “dwelling house” and thus an “only or main residence” for CGT but it must surely depend on the degree of completion. CGT requires only that it should be objectively a “dwelling-house” and factually the residence of its owner. It does not strictly import the alternative test of “suitability” for SDLT or what HMRC identify as the criteria for a single dwelling being separate from another for that tax. There must be a point at which an incomplete building cannot yet be said to be a “dwelling-house” at all or “residence” even if the owner is living there after a fashion at a time when no one else would. I would certainly question whether that would be accepted by HMRC unless he genuinely lived there exclusively rather than tried to nominate it while also living elsewhere. Self-builders are never in any event totally free of the risk of s224(3) or trading: see CG65200 onwards.

Jack Harper

7

Unfortunately Jack i disagree. Ive looked at this many times for new build clients and the legislation links to that definition IMO.

According to many sources house-boats and caravans are capable of claiming the RNRB.

I dont see that definition in the IHTA 1984 legislation either. Dwelling is defined as caravan or boat in the public order legislation.

If various statutes defines dwelling in various ways I find it diffcult to follow that HMRC would dispute any claim against the RNRB based on a very wide definition.

Ive posted the links above.

Richard C. Bishop
PFEP

8

Is there anyone on here who agrees with me and disagrees with Richard? CG64230 says: “The term ‘dwelling-house’ is not defined in S222 TCGA92 so when considering the question of what makes up the entity of the dwelling-house, we are guided by the principles laid down in case law”. While I do not always agree with HMRC it would be strange for them to go on saying this if Sch 1B had supplied the operative definition as from 6 April 2019.

I did not follow Richard’s comment “IHTA legislation refers to TCGA 1992 for the definition of “dwelling” - “dwelling” has [F923 the same meaning as it has for the purposes of Schedule 1B to the 1992 Act;] - The Finance Act which then refers to TCGA 1992”. What is the statutory provision that makes the definition in para 5 Sch 1B relevant to s222 TCGA 1992 and s8H IHTA 1984? “F923” means nothing to me. If this is a typo for FA 23 I see nothing in that Act of relevance.

My view is that new s1H TCGA was introduced by s13 and Sch 1 FA 2019 and the definition in new Sch 1B, introduced at the same time, which includes the definition in para 5, applies and applies only to determine the rate of CGT on “residential property gains” and for no other CGT purpose and certainly not for any IHT purpose.

Para 1 (2) of Sch 1B says “The question whether or not a person disposes of residential property is determined in accordance with paragraphs 3 to 7”. Those paragraphs include para 5 and so its definition is applicable to and only to answering the express question quoted.

Jack Harper

10

I’m more than happy for comments from the forum on this question it would be most useful - I have condensed my research below.

Claiming the RNRB

  1. To claim the RNRB the individual must hold a " “qualifying residential interest”.
  2. IHTA 1984 8H describes this interest as a “dwelling-house”.
  3. IHTM46030 - More detailed guidance: dwelling-house - HMRC internal manual - GOV.UK (www.gov.uk) IMTM46030 provides unambiguous guidance on dwelling-house.

“A dwelling-house includes any land occupied and enjoyed with it as its gardens or grounds”.

On reading IHTA 1984 the legislation uses the terms: dwelling-house, residential property interest and qualifying residential interest interchangeably dependent on the sections you read. Poor drafting perhaps?

My interpretation of the actual legislation. (I accept this is “dwelling”).

See: IHTA 1984 (8)(H)(2) A “residential property interest”, in relation to a person, means an interest in a dwelling-house which has been the person’s residence at a time when the person’s estate included that, or any other, interest in the dwelling-house.

  1. IHTA Part (3) Interpretation - IHTA 1984 Part (3)(8)(2)(3) (see below) provides some clarity - as per my comments above IHTA 1984 Part (3)(8)(2) provides and wide remit. I’d suggest Part (3)(8)(c) covers ‘off plan’.

To assist us further para(3) “dwelling” (and the meaning of) IHTA 1984 was amended by FA 2019 F923.

The link provides the following schedule:

Finance Act 2019 Finance Act 2019 (legislation.gov.uk)
(b) in the definition of “dwelling”, for the words from “the meaning” to the end substitute “ the same meaning as it has for the purposes of Schedule 1B to the 1992 Act

This refers to TCGA 1992 Taxation of Chargeable Gains Act 1992 (legislation.gov.uk)

Schedule 1B Taxation of Chargeable Gains Act 1992

Dwelling: basic meaning

5(1) For the purposes of this Schedule a building is a dwelling at any time when—
(a) it is used, or suitable for use, as a dwelling, or
(b) it is in the process of being constructed or adapted for use as a dwelling, and, in each case, it is not an institutional building.
(2) Land that at any time is, or is intended to be, occupied or enjoyed

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11

The provisions you quote in paragraph 8 apply and apply specifically only to Schedule A1 IHTA, which is precisely where they appear. They do not apply to IHTA in general and so do not apply to RNRB. And they do not apply to TCGA 1992 s222.

PART 3Interpretation#### UK residential property interest

8(1)

In this Schedule “UK residential property interest” means an interest in UK land-
The magic words are in Bold and underlined by me not as they present in the Act.

Jack Harper

12

I’ve not indicated it did relate to the RNRB wholly it was drafted in 1984 I assume.
I think it does provide further clarification on the meaning of dwelling in the context of the whole legislation on the basis is was amended in 2019.

Either way IMTM46030 provides sufficient guidance to answer the original question IMO.

Richard Bishop
PFEP

13

I cannot trace IMTM46030 and IHTM46030 seems to have no relevance. I am surprised at your approach to definitions in statute which are a small but important part of the science/art of statutory interpretation. It is not permissible, even dangerous, to mix and match definitions in different statutes or even within a single one. “Dwelling” and “Dwelling-house” have the meaning appropriate to each and every statutory provision in which they appear, although in the absence of a specific definition they may have their meaning as ordinary words and thus have something in common. Definitions or the lack of them in legal documents perform a similar function, though the task is to ascertain what the parties meant not Parliament.

The original query was about whether a house under construction could be a PPR for CGT relief. It has to be a “dwelling-house”. That term is not defined. This is not a matter of opinion. It is a fact. It then has to be interpreted as an ordinary English word, contextually or purposively. Its use in other statutes as an ordinary English word, but not as specifically defined there, may assist and Counsel routinely invites the Court to consider such instances.

To assist the querist I felt it was right to point out that it could not be accepted as unequivocal law that a house under construction in which the owner was sleeping and eating meals fulfilled the test of being a dwelling-house let alone a residence. You may have advised several clients that it does, which is your prerogative, and it is of course highly fact-dependent and may well turn on the degree of completion at the date of disposal. SDLT recognises that a house under construction can be residential property, because it employs an extended definition of “dwelling”, but it must nonetheless be a “building”. SDLTM00400 indicates that HMRC will on given facts not accept that the test has been met.

CGT has nothing to say about whether a building in the process of being constructed is a “dwelling-house” or even if it is whether it is a residence of its owner. As HMRC say this depends on case law. I am not aware of any authority which points clearly one way or the other and if there were it would still turn on its particular facts. I am aware that the law reports are full of taxpayers pushing the boundaries of the relief. I am aware too that HMRC will look carefully at a self-builder, especially one who has used his skills to build other houses, owned by him or not, who claims to avoid tax by “living” in the building he has been constructing. Even if they accept the building is a dwelling-house and his only or main residence they may argue that s224(3) makes his gain liable to CGT or that it is a trading profit.

He may well succeed by omitting the gain from a tax return. After all, HS283 says “You will not need to complete the Capital Gains Tax Summary pages of your tax return if you’ve made no other disposals or chargeable gains and do not want to make any capital gains claims or elections”. But if he does it more than once he could be in difficulty later with penalties and interest. If he has any kind of other residence while he is “residing” in the incomplete building,the same may ensue. And if he owns that other residence and does not notify in time his only or main residence becomes a question of fact which HMRC may resolve in favour of the other residence. In Nicola’s case the property is the only residence but in my view it would be right to warn her client about s224(3) and trading and the doubt as to whether any given incomplete building can be eligible for CGT PPRR.

Jack Harper

15

Im not refering to the CGT question.

Malcolm answered it.

Im refering to the RNRB question.

My answer -

The plus side is these types of property qualify under IHT legislation. You can claim the RNRB.

I not sure who’s answers you’re reading. Ive not mentioned CGT or SDLT or referred to Q1 in anyway shape or form.

Helpful guidelines here as you cant find it.

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16

This paragraph 46031 from IHTM does not deal with whether an uncompleted building can be a residence for RNRB. That was the original question. The statute does not cover the point nor does IHTM. There is no definition of “dwelling-house” or “residence” in s8H IHTA and SchA1 para 8 does not apply, as it is specifically restricted to that schedule. Definitions from other taxes cannot simply be imported.

So under the rules of statutory interpretation they have their meaning as ordinary English words. In my view there must be a doubt but it probably turns on the degree of completion of the building at the relevant time.

A nephew is not a person who can “closely inherit” within s8K, not being a lineal descendant, unless he is a step-child, or adopted, or a fostered child, or the deceased was his guardian.

Jack Harper

17

But the deceased was the child’s legal guardian.

Malcolm Finney

1 Like
18

You are right of course Malcolm.

Jack Harper

19

Jack, wasn’t trying to be a clever dick !

Malcolm Finney

20

Thank you both. I think we got there in the end … very interesting discussion and I appreciate your advices!

21

Nicola certainly raised an interesting exchange of views. This illustrates so well what an outrageous cop-out it is by the legislature to fail, deliberately or not, to provide workable definitions of terms in statutes that will cause great uncertainty in applying them to factual situations. Some of those will admittedly be unusual but far from unforeseeable.

The CGT PPR legislation has given rise to much litigation. It is hard to criticise HMRC for their part in this, in so far as they have also been dealt a bad hand and have to play it. They surely should be forthcoming earlier, to minimise litigation, in publicising a settled view of theirs and in playing whatever role they have in framing new law or having problems caused by it corrected once they emerge.

This has been exacerbated by self-assessment, particularly when legislation pre-dates it and PPR basics came in with FA 1965. The legitimate non-disclosure position, both for interim and final reporting, is designed to minimise work for HMRC. No claim is needed for an individual as opposed to a trustee and if full relief is expected for the only disposal in a tax year HMRC will not find out apart from a discovery.

s223ZA TCGA 1992 was added by FA 2020. Previously ESC D49 had covered the ground and had to be legislated, rather belatedly, following House of Lords disapproval of concessions in Wilkinson in 2005. It potentially affects all self-builds, because without it the acquisition of the site would not begin a period of ownership which could attract relief. It casts no light on what is a “dwelling-house” or “residence” and thus adds the further uncertainty of “moving-in time”, the building’s first becoming a residence, and of the notion of “completion” of construction etc. The Manual is not helpful here.

SDLTM00365A-00430 are focused on whether a dwelling is a “single dwelling” but they do contribute somewhat to revealing the general characteristics HMRC expect for a given habitation to be a dwelling at all. This approach is now underpinned by a slew of Tribunal decisions which shine further light. Of course, if HMRC had publicised earlier than 2019 their settled view (which they undoubtedly had had for several years) much of that litigation could have been avoided by at least indicating the height of the hurdle the taxpayer must jump over. It was prompted by legislation on Multiple Dwellings Relief so inept it has had to be repealed.

Unless HMRC is hopelessly compartmentalised they should have recalled that, before FA 2003 was even conceived, already, for CGT PPR, litigation had often had to determine the identification of the dwelling house,(CG4230P onwards) or of the only or main residence (CG4420P onwards). For example Goodwin v Curtis and Sansom v Peay: CG64460. The latter raised the possibility that “temporary accommodation” would not be “residence”, which might be levied at Nicola’s builder.

In Higgins [2017] UKFTT 0236 HMRC unworthily instructed Counsel to argue that ownership commenced when the taxpayer paid the deposit to buy an apartment, at a time when it was “literally a space in a tower”, and not 5 years later when it was physically and legally completed. Lee [2023] UKUT 242 is also of interest on this point and for the Tribunal’s observation that statute often fails to give guidance on the meaning of a term but the courts and tribunals are “well versed” in applying such a term to a particular set of facts. No doubt, but not at their own expense, at someone else’s, for whom the outcome remains uncertain until they have condescended to impart their wisdom, whereas clear guidance would have done them out of a job and obviated the jeopardy of a discovery assessment…

Jack Harper