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.
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.
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.
Practitioners therefore should always be aware of this possibility when dealing with computations although HMRC may not readily accept this basis at the outset.
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:
Ignoring the effects of s 224(2)
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
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:
Value in 1992 400,000
S 222 exemption (last 36 months) 3/5ths × £100,000 60,000
S 223(4) relief ([8.337]) 40,000
Chargeable gain Nil