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June 22, 2017
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Ritchie v HMRC - Principle Private Residence Relief Pitfalls

On the sale of your home, Principle Private Residence (PPR) relief may be available to reduce your chargeable gain to nil - provided that the necessary conditions have been met.

The rules surrounding the availability of PPR relief can appear deceptively simple, however, as evidenced in the recent First-Tier Tribunal case of William & Hazel Ritchie v HMRC, your specific circumstances should be considered in detail to ensure that the relevant conditions have been met.

Background

  • William & Hazel Ritchie (the "Ritchies") bought a piece of land in 1987 for £11,000, the only buildings on which were a large shed and another small building.
  • The Ritchies rented a small house on the neighbouring land as their place of residence, but used the shed on the land for storing their children’s toys, the family car, various tools, firewood, vegetables, sports equipment, and the ploughs which William used in competitions.
  • They began construction of their residence in 1992 and first moved into the house in January 1995 (7 and a half years after the land was purchased).
  • The land, measured at 0.699 hectares (ha), was sold in January 2017 for £2m and the Ritchies claimed PPR relief on the full gain.

HM Revenue & Customs rejected the claim for the full amount, and the Courts were faced with the following issues:

  1. Was the area of the land too large?
  2. Did the shed make up part of the “dwelling house”?
  3. Did the land qualify for relief for the period from purchase to the construction of the house? (the “pre-occupation period”)?

“Permitted Area”

PPR relief is available on the property and the garden/grounds provided that the area is less than 0.5 ha and was enjoyed with the building as part of the overall curtilage.

Beyond 0.5 ha, relief may still be available if it can be proved that the land is required for the reasonable enjoyment of the house, taking its size and character into account. Consideration should also be made to the fact that there is a tendency towards smaller gardens for modern properties and that houses in rural areas have larger gardens/grounds than those in urban areas.

The Ritchies argued that the full 0.699 ha that made up the land was required for enjoyment of their home.

When making their decision, the Courts stressed that ‘required’ was to be equated with necessary, not merely desirable. With this in mind, they compared the gardens and grounds to those of similar properties in the area and found that the necessary area was 0.1 ha.

“Dwelling House”

PPR relief applies to a gain arising on the sale of a “dwelling house” which is/has been the taxpayer’s only or main residence.

HMRC contended that the “dwelling house” did not include the shed because the building was not within the curtilage of the main house; i.e. it was not attached. The shed was 85 metres from the main property and did not form an integral whole with the main house.

The Ritchies and the Court disagreed with this interpretation, and found that the dwelling house comprised the main property and the shed.

In arriving at this conclusion, the Court considered decisions made in previous cases, notably that:

  • A “residence” includes not only the main physical building in which the living rooms, bedrooms, and bathroom are contained, but also the appurtenant buildings, such as a garage, summer house, or greenhouse.
  • The dwelling-house may or may not be comprised in one physical building and may comprise a number of different buildings.

Occupation

As it was accepted that the shed made up part of the “dwelling house”, the Ritchies argued that it follows that this was the case throughout the whole period of ownership.

HMRC disagreed and contended that as the house only became the Richies’ residence from January 1995 (the date they moved into the property), the period from acquisition of the land to then was not covered by relief.

The Courts agreed with HMRC and found that in the period 1987 - 1995 the house, together with the shed, had not been their only or main residence as the house did not exist until 1995.

The Courts were now faced with a question: How was the gain was to be apportioned? Time apportionment made 35% of the gain taxable, however it was absurd to conclude that the land increased in value by £630,000 between 1987 – 1995. In light of this, it was held that the gain should be calculated to reflect the value of the land when they moved in, i.e. on the basis that the land increased in value from £11,000 to £200,000 following the construction of the property (construction costs being deductible as 'enhancement expenditure').

Further information on PPR relief can be found in our previous blogs.

If you are selling a property and have any doubts about whether you might qualify for PPR relief, please contact a member of our team for a no-obligation chat.

Contact us today to discuss your tax requirements.
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