Main Residence Relief: Combination of Lettings Relief and Last 36 Months of Ownership

Capital Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP author of Capital Tax Review, considers the interaction of two forms of capital gains tax relief for only or main residences.

Context

There is a very generous extension of main residence relief to a period when the taxpayer does not occupy the property by reason of a qualifying letting under TCGA 1992 s 223(4). The amount of relief is in effect the lowest of:

(a) the amount of the only or main residence relief;

(b) the gain arising by reason of the letting; and

(c) £40,000 per joint owner, including husband and wife separately.

What happens where the property was let during all or part of the last 36 months of ownership? A fractional approach

An article by Dean Wootten in Taxation of 14 April 2005 suggested that the amount of lettings relief given during a period of absence depends on how the legislation is interpreted. He produced the following example:

Example

Fred sold a house on 31 May 2004 realising a pre-taper gain of £80,000. The house was purchased on 1 June 1997 and was occupied as a residence until 31 May 1998 when Fred moved to another residence. The house was empty until 1 June 2002 when it was let as residential accommodation until the date of sale.

	Occupation	Absence	Total
1.6.97 – 31.5.98 (actual)	1	0	1
1.6.98 – 31.5.01 (empty)	0	3	3
1.6.01 – 31.5.04 (last 3 years)	3	0	3
Total	4	3	7

The computation will then become:

	£	£
Indexed gain		80,000
Less: only or main residence relief £80,000 x 4/7		(45,714)
		34,286
Less: Lettings relief
Lowest of: (i) only or main residence relief	45,714
(ii) letting gain (2/7 of £80,000)	22,857
(iii) maximum	40,000	(22,857)
Gain before taper relief		£11,429

The author acknowledged that some commentators would argue that in the above example the 'gain by reason of the letting' is £0. As the property was let for two of the last three years the only or main residence relief covers that period and, consequently, the chargeable gain of £34,286 does not relate to the letting period, but rather to a period when the property was empty. By contrast, the author maintains that s 223(2) gives an arithmetic fraction for only or main residence relief which is not linked to any particular period. Section 223(2) is there to calculate which proportion of the gain is covered by only or main residence relief. Arguably, it does not then affect the operation of lettings relief under s 223(4). The question therefore is whether it is acceptable (when more beneficial to the taxpayer) to follow a fractional approach rather than a time specific approach.

Arguments against a fractional approach

Two reasons suggest that the fractional approach is wrong:

(a) Parliamentary draftsmen are not known for their generosity (especially in tax legislation). So to enable the taxpayer to have two reliefs covering the same period – ie the last 36 months of ownership AND £40,000 maximum – is a most unlikely situation.

(b) The phrase used in s 223(4) is 'chargeable gain by reason of the letting'. The draftsman did not have to include the word 'chargeable' and arguably did this to prevent such double counting.

HMRC's view

Dean Wootten suggested that HMRC do not have an official view on the matter. While it is true that the current edition of the Capital Gains Tax Manual does not have any examples which currently address this issue, leaflet IR 87 entitled 'Letting Your Home' does have such an example (no. 5 on page 15) which uses the fractional approach (£112,000 being 8/10 of £140,000, which is the total letting period).

Application

The position therefore seems that clients should be advised that HMRC do appear to accept the fractional method, though they should be aware of the possibility of the more restrictive interpretation.

(Taxation 9 June 2005, p 275, letter from Doug Ramage)

July 2005

Matthew Hutton MA, CTA (fellow), AIIT, TEP

More Information

The above article has been taken from Matthew Hutton's Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php.

About the Author

Matthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing.

Matthew Hutton's Autumn Series of Estate Planning Conferences resume on 15 September 2005 in Stratford-upon-Avon. The dates and venues are listed below.

SDLT Conference

Matthew Hutton is running an SDLT conference in London on 31 October 2005. For further information, please visit TaxationWeb's Tax Events Calendar: www.taxationweb.co.uk/taxevents

Matthew Hutton's Autumn Series of Conferences

Thursday 15 September - Stratford Manor, Stratford-upon-Avon

Tuesday 20 September - Lord Haldon Hotel, Exeter

Tuesday 27 September - Spa Hotel, Tunbridge Wells

Tuesday 4 October - Wood Hall, Wetherby

Tuesday 18 October - Renaissance Hotel, nr Derby

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About The Author

Mark McLaughlin is TaxationWeb's Co-Founder, Director and Technical Editor. He is a Fellow of the Chartered Institute of Taxation and a member of the Association of Taxation Technicians and the Society of Trust and Estate Practitioners. He lectures on tax subjects, is co-author of Tottel's IHT Annual and Ray & McLaughlin's IHT Planning, and Editor of Tottel's Tax Planning and Annual series. Mark's work has also been published in Taxation, Tax Adviser, Tolley's Practical Tax, Tax Journal and Simon's Weekly Tax Intelligence.

Since January 1998, Mark has been a consultant in his own tax practice, Mark McLaughlin Associates, which provides tax consultancy and support services to professional firms. He publishes a regular 'Tax Update' e-Newsletter for clients and other professional firms. To receive future copies, contact Mark via his website.

Article Added Monday, 22 August 2005

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