Lost money on former PPR now BTL yet CGT still to pay Unfair

[Incredulum]

How often do we see this?

House bought in 2001 for 100k and became PPR. In 2007 it was worth 2m at the peak of the market, and let out. In 2012 it is sold for 1.1m. These numbers are perfectly possible in some parts of inner London. CGT is payable on 250k, yet the property has lost money whilst it has been a BTL.

TCGA 224(2) allows for an adjustment in a just and reasonable manner for the purposes of s223 (PPR) relief if "at any time in the period of ownership there is a change in what is occupied as the individula's residence... for any other purpose.

Applying this on a just and reasonable basis, the 900k loss during the period of letting is split 50% (last three years) as PPR relief - so not an allowable loss - and 50% an allowable loss. CGT payable - nil.

Anybody have any experience of applying this?

[pawncob]

And my shares in BT were once worth £21 each. (But stupidly I didn't sell them, so I lost money (on paper)).

CGT is payable on the overall profit, not the never never land might have sold it for £2m gain, so think yourself lucky.

[Incredulum]

1. Your shares were never partly used for business and partly used for living in.

2. There is no equivalent to s224(2) for shares... because of '1' above.

3. On account of '1' above there is no just an reasonable apportionment possible for shares.


So, does anybody have any experience of arguing that 224(2) should apply such that it is unreasonable to pay CGT on a property that lost value whilst let out, yet apparently suffers a CGT charge.

It's a perfectly reasonable argument to make, given what the legislation states.

[Incredulum]

Interesting that nobody has commented. Sadly it wasn't my idea, but comes from Simon's tax planning at Part B (individuals) Chapter 8 (CGT) 4F. This is what they write:

Section 224(2) provides that if at any time in a period of ownership there is a change in what is occupied as the individual's residence, whether on account of a reconstruction or conversion of a building or for any other reason, or there have been changes as regards the use of part of the dwelling house for the purposes of a trade or business, or of a profession or vocation, or for any other purpose, the relief given by s 223 may be adjusted in such a manner as the Commissioners concerned may consider to be just and reasonable as set out above.

[8.314]
The normal relief under s 223 is allowed on a time apportionment basis. This may, however, not be advantageous to the taxpayer in days of variable inflation rates.

[8.315]
Where an individual changes his use of a residence so as to fall within the provisions of s 224(2) HMRC has, in the experience of the writer, accepted in some cases that the provisions can be applied so as to compute the gain by reference to valuations at each relevant date rather than by reference to a straight-line time apportionment basis.

[8.316]
Practitioners therefore should always be aware of this possibility when dealing with computations although HMRC may not readily accept this basis at the outset.

Example
A property was acquired by Sue in June 1988 to be used as her only main residence and the total cost was £100,000.

The property was occupied as a main residence until June 1992 when Sue had to go and live with an elderly sick relative.

It was anticipated that the property would be sold at that time and a valuation was obtained at £400,000 but, in the events which followed, the property was retained and let as residential accommodation until June 1994.

At that time the tenant vacated and the property was advertised for sale but remained empty until the eventual sale occurred in June 1997 at proceeds of £500,000.

Ignoring the effects of indexation the capital gains arising would be computed as follows:

Solution 1
Ignoring the effects of s 224(2)


£
Proceeds 500,000
Less costs 100,000
Gain: sub total 400,000
S 222 exemption:
1988–92 plus last 36 months
7/9ths × £400,000 311,111
Sub total 88,889
S 223(4) relief ([8.337]) limited to 40,000
Chargeable gain 48,889


Solution 2
Applying s 224(2)


£
(a) Computation of exempt gain to 1992:
Notional value in 1992 400,000
Less costs 100,000
S 222 exempt gain 300,000
(b) Subsequent gain to sale:
Proceeds 500,000
Value in 1992 400,000
100,000
S 222 exemption (last 36 months) 3/5ths × £100,000 60,000
40,000
S 223(4) relief ([8.337]) 40,000
Chargeable gain Nil

[AvocadoK]

Hi Incredulum
I expect no-one has commented because you asked whether anyone has tried it - I know I haven't!
You have, of course, taken things a step further than what is envisaged in Simons. In Simons, the overall gain is apportioned into 2 parts, but both parts are a gain. In your case, you want to turn an overall gain of £1m into a gain of £1.9m and a loss of £0.9m. I think this is stretching things too far - you are asking for relief on a larger gain than the total gain before PPR.

I suppose you could compare your situation with one where you had sold the PPR at the top of the market, reinvested into a BTL, and sold the BTL at a loss a year later. You would have no tax in that situation, so you might argue that it was 'reasonable' to 'adjust' the PPR in your case to what it would be in the situation just described. It's the sort of thing I might ask for a non statutory clearance on.

Rgds
AK