Taxpayer wins appeal to claim Private Residence Relief on annex
In the recent case of Crippin v HMRC , the taxpayer (Mr Crippin) was successful in his First Tier Tribunal appeal in relation to claiming Private Residence Relief “PRR” on an annex.
This blog will discuss this case and its relevance for those who may be disposing of similar assets.
In 2006, Mr Crippin purchased a house named ‘Loaningdale’ and an adjacent annex named ‘Bothy’ for him and his family. Mr Crippin and his partner were not married.
In 2009, Mr Crippin submitted a planning application to construct an ancillary accommodation above Bothy (and the double garage attached to Bothy). This was named ‘Benko,’ and this eventually became a three-bedroom flat with a kitchen/living area and bathroom, completed in July 2011.
Benko was accessed through a separate entrance or through a balcony on the first floor which was shared with Loaningdale.
The family used Benko mainly as extra storage space to begin with, and then from October 2011 his partner’s friends lived in the property (making some financial contributions in relation to their stay). However, there was no formal tenancy agreement and Mr Crippin and his partner’s possessions were still located in the property. Mr Crippin, his partner, and his parents also stayed there when it was empty.
After his partner’s friends left, from October 2012 Benko was advertised for use as a holiday let and was rented out for a total of 31 days. When it was not being let out, it was used by Mr Crippin and his family.
Private Residence Relief
In summary, If you sell a dwelling house (or part of a dwelling house) which is your only or main residence and has been your only or main home throughout your period of ownership, you will not be required to pay Capital Gains Tax (“CGT”) if a capital gain arises on the disposal. This is because Private Residence Relief (“PRR’) is available for the full period of ownership, reducing any chargeable capital gains to nil.
Please see my previous blogs for further details in relation to this relief.
In October 2012, Mr Crippin needed to repay a loan from a company of which he was a director. In order to raise the funds for this, he sold Benko to his partner for £200,000 (market value) on 24 January 2013.
As Mr Crippin believed that Benko was an ancillary part of the dwelling house in which he and his family lived in as their only or main residence, he did not include the sale on the CGT pages of his 2012/13 tax return on the basis that PRR (discussed above) was available.
In October 2014, HMRC opened an enquiry into Mr Crippin’s 2012/13 tax return and concluded that Benko had never been part of a dwelling house that had been Mr Crippin’s only or main residence. A closure notice amended the return so that a CGT liability of £26,978 arose on the disposal.
Mr Crippin appealed to the First Tier Tribunal (“FTT”) on the basis that CGT should not be payable on his disposal of Benko because it was an ancillary part of his only or main residence.
The Decision and Its Significance
The FTT decided in favour of Mr Crippin. The significance of this (based on the reasons for this decision) is as follows:
- In this case, it was accepted that a dwelling house can consist of more than one building, even if the other building is a separate dwelling house in its own right (as in the case of Lewis v Rook ) and these can both be regarded as constituting an individual’s only or main residence for the purposes of PRR.
- This case established that the following factors were indicators that the separate dwelling house was part of the individual’s only or main residence for PRR purposes:
-the lack of formal agreement when the property was let to friends;
-unlimited access to the property;
-personal items being kept there; and
-family members and the individual and their family staying there when it was empty.
- However, this case also established that the property could not be considered as part of the individual’s only or main residence during the period when it was advertised as being available for holiday lets (even though there was some personal use of the property by the individual and their family during this period). Whilst normally this would mean that PRR would be restricted, in this case the period was covered by the final 36 month PRR period (note: this has now been reduced to 9 months), so no restriction was required.
If you are disposing of an annex and are unsure whether it may constitute part of your only or main residence for PRR purposes, please contact a member of our team and we will be happy to discuss this with you.