Jam Cottage and Toast Cottage are two sides of semi-detached property.
Jam Cottage has been owned by B since 2011 and has been rented out by them ever since. Toast Cottage was gifted into a discretionary trust by B’s mother in 2011 and was subject to a claim for s.260 Holdover Relief. It too has been rented out since 2011, and will shortly be appointed out of the discretionary trust into B’s absolute ownership, subject to a further claim to s.260 Holdover Relief.
B plans to evict both tenants, knock the two houses into one and occupy the pair as their principal private residence. Assuming, for the sake of easy maths, that they live in the property for another 13 years and then sell, how if at all, will PPR apply to the sale?
Will B be denied PPR in relation to one ‘side’ of the combined property and granted it on the other? Certainly they will therefore need to keep careful records of any capital expenditure, but will this be apportioned equally, or will there now be a tax incentive for the conservatory to be attached to one side of the property rather than the other?!
Any thoughts or guidance will be gratefully received.
This set of facts is not apparently dealt with by the legislation. s222 (7) TCGA deals with the situation where the owner has had different interests at different times. Note that the outcome it ordains is apparently the same whether or not the interests have merged in law. This provision does not identify the particular dwelling-house and assumes that the interests are in the same one. It merely clarifies the start date of the period of ownership.
The starting point is that in 2011 the property was divided into two separate interests in a dwelling house. As trustees owned Toast thereafter there were also from then on two different taxpayers. You do not say how the legal title was dealt with but that will not of itself affect the tax analysis.
The bad news is that if hold-over relief has been claimed PPRR on a later disposal is denied by s226A. So the trustees can appoint out Toast with another such claim but there will be no PPRR for the appointee B on a later disposal by him. Jam will be regarded as a separate asset and eligibility for PPRR will begin to be attracted by Jam once B moves in to the new entirety as his main residence.
Whatever the deficiencies of the legislation it is best to regard these two assets as notionally separate for tax even if merged in fact and property law. HMRC are likely to resist any alternative computation on a future disposal by B which seeks to assuage the loss of relief on Toast by piggy backing onto it the partial PPRR that will gradually accumulate on Jam. This is unfair in a way but the intention of the legislation in FA 2004 was to prevent gains being magicked away by hold-over relief combined with PPRR. So if the trustees made a disposal to B (even if PPRR had otherwise been available e.g occupied by a trust beneficiary) the purposes of the law would be served but of course tax would become payable without cash inflow. The same result would have followed if B’s mother had not claimed hold-over relief in 2011(it seems she was not entitled to PPRR). At least the tax on the Toast gain can be deferred until a future disposal by the trustees claiming hold-over relief.
s43 TCGA deals with deductible expenditure where assets have been “merged” which I think is what would happen here factually regardless of the title arrangements. Here the conservatory raises a difficulty. I would expect that on a future disposal of the entirety the conservatory, regardless of its physical location, would constitute an accretion in value to the whole property so that its cost would have to be apportioned to the notionally separate assets, Toast and Jam; s222 (10). The acquisition costs of each are distinct and will be attributed to each rather than apportioned.
I cannot say that the law precisely dictates this analysis. I think it is one which HMRC would accept. B could still argue that his new occupation of the entirety is an entirely new asset. Though that invites the counter-argument that both of the old ones have been disposed of it is hard to see how anyone can dispose of an asset to themselves. I think it would be wishful thinking for B to assume that he can start his PPRR period of ownership of both properties from the date that he moves in to occupy them as a single residence and for him to make a return of a future disposal on that basis, without a sound legal argument for it, would be beyond careless and so deliberate.
Many thanks for the comprehensive reply. It is an odd case and perhaps a good study in the down stream effects of well intentioned anti-avoidance provisions. It sounds, rather perversely, like it might be in the clients’ interests to maintain the separation of ownership between the two sides.
First, so as to allow capital expenditure to be incurred on Toast Cottage to be fully deducted on sale rather than being partially ‘lost’ by apportionment to Jam Cottage.
Second, to avoid the question of whether, if they do become merged into a single asset from CGT purposes. FA2004 would apply to deny PPRR over the whole.
Under TCGA 1992, s 222(6) - if both where held joint they could nominate one as thier maim residence and sell that - then live in the 2nd and claim again (on sale).