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TaxationWeb by Matthew Hutton

This article is the text of the Notes supporting a lecture given by Matthew Hutton at the STEP Conference "Capital Taxation After the Autumn Statement" in Central London on 24th February 2004. Reference should be made to Finance Bill 2004, which was published after Matthew's lecture.Capital Gains Tax And Private Residences - Blocking The Second Home "Scam" And Codifying Esc D5



This article is the text of the Notes supporting a lecture given by Matthew Hutton at the STEP Conference "Capital Taxation After the Autumn Statement" in Central London on 24th February 2004. The Notes deal with only Schedule 2 (and not also with the more general Schedule 1 restricting the use of hold-over reliefs on gifts into settlor-interested trusts from 10th December 2003). Reference should be made to Finance Bill/Act 2004 published after Matthew's lecture, as opposed to the draft legislation referred to in these notes.

1. What was the "scam"?

1.1 Alan and Amanda Jones lived happily in London for many years. Together they owned a house in South London which as a matter of fact (if not also by election) had always been their main residence for CGT purposes. They also had a cottage in the country which they occupied sufficiently regularly to be a residence. It was worth £500,000, owned as tenants in common in equal shares and showed a significant gain over the indexed base cost. They have three grown-up children, the youngest of whom Emily was quite prepared to occupy the cottage for a period of time.



1.2 Each of Alan and Amanda made a discretionary settlement and gave his/her share in the cottage to the trustees. The gain was held over under s260 TCGA 1992. The trustees have power to allow a beneficiary to occupy any residence comprised in the trust fund. (Whether the settlor and spouse would be included as potential beneficiaries or were irrevocably excluded would rather depend on whether they wished to benefit from the sale proceeds of the house. If included, care had to be taken to minimise the chances of a successful Revenue attack on the grounds of "circularity" - e.g. if the proceeds were simply advanced back to the settlor.) Emily took up occupation as a beneficiary, if necessary putting in a joint main residence election with the trustees. When the house was ultimately sold on advance out of trust (before, as we now know, 10th December 2003), the whole of the gain would be exempt under s225 TCGA 1992, including the held-over gain.



1.3 Among points to watch were:



- the trust must be discretionary on advance of the property to the trustees;



- the property must actually become a residence of Emily as a beneficiary;



- it must be shown that under s224(3) the trustees did not acquire the property "wholly or partly for the purpose of realising a gain from disposing of it";



- care should be taken to ensure that Emily does not acquire an interest in possession which then comes to an end on her ceasing to occupy (if she were to do so before sale);



- generally, the whole arrangement should evidently have sufficient substance to defeat any Revenue attack under Ramsay principles. It might be useful both if settlor and spouse were excluded from benefit and there were good family financial reasons for keeping the settlement in being following the sale of the property at least for a few years - e.g. for the benefit of grandchildren.



1.4 So much for the "scam", although, in the view of this lecturer, such a combination of s260 hold-over relief and s225 main residence relief for trustees was a perfectly respectable application of statutory reliefs. The arrangement had been espoused on the lecture circuit for at least the last ten to fifteen years (not least by this lecturer). It is unknown how many such arrangements have been put in place, but the Revenue clearly decided that "enough is enough" and have acted to stamp it out both for the future and also (albeit, with transitional relief) for arrangements already in being at 10th December 2003 where the trustees had not yet sold the property.



1.5 It is interesting that the Revenue have chosen this particular method of countering the arrangement. An alternative might have been to restrict the ability to hold over a gain on entry into a discretionary trust, except to the extent that the value of the assets settled exceeds the nil-rate band and there is a positive charge to Inheritance Tax at 20%. This was a suggestion mooted at para 6.37 of the 1991 Consultative Document "The Income Tax and Capital Gains Tax Treatment of UK Resident Trusts". But the idea was never taken further. And, if enacted, it would have scuppered the use of discretionary trusts for sheltering gains on other assets e.g. stocks and shares, not so much by using a specific relief or exemption from tax, but especially in cases where there were large numbers of e.g. grandchild beneficiaries (even if under the age of eighteen) by advancing out of trust each year (again with the benefit of hold-over relief) sufficient value of the shares to fall within the beneficiaries' own annual exemptions for CGT purposes. That device, undertaken with care, again so as not to excite the Revenue into raising Ramsay-type arguments, remains effective in principle.

2. The New Draft Statutory Provisions - an Overview

Draft clause 2 and Schedule 2, to be inserted into Finance Bill 2004, amend the regime for private residence relief in 8 paragraphs as follows:



- Makes a technical amendment to the provision for making a main residence election.



- Amends the principal section s223 (the computation of relief) by qualifying the rule in cases affected by the latest amendments.



- Amends the principal section s224 in the same way.



- Amends the provision for the mechanics of giving a main residence election where a property is owned by trustees.



- Codifies, in new s225A, the Extra-Statutory Concession D5 which extends main residence relief to disposals by personal representatives.



- Inserts new s226A to disapply relief under s225 (subject to specific exceptions in s226B), in cases where the gain to be computed on disposal, whether by trustees or by an individual, depends to any extent on a hold-over election under s260.



Is a commencement provision, broadly providing for the amendments to take effect from 10th December 2003.



Is a transitional provision which applies where, as at 10th December 2003, property was already in a settlement following a hold-over election. Relief for any gain accrued at 10th December (on a time apportionment basis on ultimate disposal) is preserved, but the trustees are specifically precluded from getting the benefit of the "last 36 months rule" for any gain accruing after 9th December.

3. A Look at the Rules in Detail

Giving and varying main residence election notices (para 1: see Appendix B13 and B38-39)

The right to elect that, as between a combination of two or more residences, one of them shall be treated conclusively as the main residence for CGT purposes runs for a period of two years from the date on which that combination of residences was acquired (see Griffin v Craig Harvey [1994] STC 54). Note that what matters is not ownership but use of a property as a residence. Use as a licensee does not count (following a change in Revenue practice in October 1994: see R189), though use as a tenant does. Once the two-year period expires, the right to elect (typically away from a factual main residence) disappears until a new combination of residences is acquired. It is important to make the election where available, even if in favour of an actual main residence, because of the right to vary by a further notice (which can take effect for any period beginning within the last two years).



There is no statutory form of election. Submission of a notice should be in duplicate, with the request that the copy is date stamped and returned.



The amendment to s222(5)(a) provides that both the initial notice and any variation by further notice should be given not to "the Inspector" but to "an officer of the Board".

Computation of relief (para 2: see Appendix B14-15 and B39-40)

Having established under s222 that a gain on the disposal of a private residence is in principle eligible for relief, s223 goes on to quantify the relief, especially in cases where the whole of the gain is not relieved. S223 does this broadly by giving relief to such part of the total gain (on a time apportionment basis) as satisfies the only or main residence conditions. Treated, however, as only or main residence occupation is the last 36 months of the period of ownership, even if not actually occupied during that period (except to the extent that any part of the property was used wholly for business purposes). The thinking behind the last 36 months (extended from 24 months) is to allow time for an individual to sell his previous property, having bought a new one, in circumstances where market conditions might be difficult. In reality, however, this generous rule allows one to "double up" the relief in cases where one of two properties is to be sold without an immediate replacement. But note that the first 12 months of ownership of the new property (or possibly 24 months) may also be treated as only or main residence occupation (see Extra-Statutory Concession D49). Does the last sentence of ESC D49 imply that only two and not also three properties can attract relief over the same period? "Where relief is given under this concession it will not affect any relief due on another qualifying property in respect of the same period."



The new provision:



tidies up s223(4) by removing an unnecessary reference to the s225 extension of the relief to trustees in cases where the special lettings relief applies under s223(4); and

inserts a new s224(8) to make it clear that the computation of relief is subject first to s224, both as is and as amended (see 3.3 below), and is restricted by new s226A (see 3.6 below) - which may be described as "the guts" of the new rules.



The Revenue notes say at 13. (see Appendix B40) that the express reference to s224, as indeed to s226A, is probably unnecessary, but the point is made for the avoidance of doubt that anyone reading s223 must look also at ss224 and 226A.

Computation of relief: further provisions (para 3: see Appendix B14 and B40)

This is merely a linguistic change to achieve consistency with other parts of the TCGA 1992: gains "accrue on" rather than "from" a disposal.

Homes occupied under a settlement (para 4: see Appendix B14 and B40-41)

S225 provides the generally very useful extension of main residence relief to cases where the property is owned by trustees and the occupation is by a beneficiary under the terms of the settlement. All the substantive provisions of ss222 to 224 are then applied, with two qualifications: it is the occupation of the beneficiary that counts in applying the relief and the main residence election where appropriate is given jointly by the trustee (or now trustees) and the beneficiary.



The changes here are largely not substantive, to achieve consistency in drafting by use of the expression "the trustees" and as in 3.1 to confirm that a main residence election or variation thereof is given not to the Inspector, but to "an officer of the Board".



The substantive change (which probably is a reflection of existing practice) confirms that relief which is available under s225 by applying s223 to a trustee situation depends on the making of a formal claim by the trustees.



Note that the main residence election or variation must be a joint notice by the beneficiary and the trustees. For example, a beneficiary might decide to withhold his signature following a request by the trustees, because to do so would prejudice the situation on his own owned property (whether a factual or an elected main residence). Had he already elected for a subsidiary residence owned by him to be his main residence, submission of an election jointly with the trustees under s225(b) would, depending on its terms, be likely to vary the election away from his own owned subsidiary residence. A person can't be "clever" in thinking that it is possible to occupy two residences, one owned outright which is his principal matrimonial residence A and the other owned by the trustees which is his subsidiary residence B, and for the same period of time get main residence relief on the owned residence and secure relief for the trustees on the subsidiary residence within the settlement. This is because, once a joint notice with the trustees is given, subsidiary residence B is treated as his main residence for all purposes of this relief.

Homes owned by personal representatives (para 5: see Appendix B14-15 and B41-42)

ESC D5 is effectively replaced by the new s225A. ESC D5 states as follows:



"TCGA 1992 s225 extends the exemption from capital gains tax given for private residences to cases where a trustee disposes of a house which has been the only or main residence of an individual entitled to occupy it under the terms of the settlement. Relief is also given where personal representatives dispose of a house which before and after the deceased's death has been used as their only or main residence by individuals who under the Will or intestacy are entitled to the whole or substantially the whole of the proceeds of the house either absolutely or for life."



The Revenue clarified the terms of the concession (see R1 75) in August 1994 by confirming that:



The occupation by the individual before and after the deceased's death must be immediately before and after the death. Continuity of occupation is required. That is, the ESC will not help the grown up son or daughter who used to live at home, but many years before their parents' death has flown the nest. It will much more likely occur in the case of the surviving spouse or such children whether minor or adult as are living at home.

"Substantially" the whole of the proceeds means 75% or more.



It is obviously better to have a relief provided by statute than by concession and generally the new statutory treatment is preferable to the previous ESC. However, the relief given to disposals by PRs remains more restrictive than that available to trustees under s225. There are six sub-sections in new s225A as follows:



(1) applies ss222 to 224 to a gain accruing to PRs on disposal of an "asset" within s222(1). S222(1) applies both to a dwelling-house and to land (garden or grounds) within the permitted area, whereas ESC D5 does not cover garden or grounds. Two conditions must be satisfied.



(2) sets out the first condition, viz immediately before and immediately after the death the dwelling-house or part must have been the only or main residence of one or more individuals.



(3) sets out the second condition. That individual or one or more of those individuals must have a "relevant entitlement" which accounts for 75% or more of the "net proceeds of disposal". The expression "relevant entitlement" is an entitlement as legatee of the deceased or an entitlement to an interest in possession in the whole or any part of the net proceeds of disposal. The word "legatee" is defined in s64(2) and would include a beneficiary of a specific gift and a residuary beneficiary, whether under a Will or under an intestacy.



Note that not all the occupants have to benefit from a "relevant entitlement". But the "only or main residence" immediately before and after the death is going to be quite restrictive. It will presumably be "only or main residence" as defined for CGT purposes. Accordingly, it may be that in order to get the benefit of the concession a grown-up daughter with her own main residence who three months before her mother died was also residing in her mother's house to look after the mother might following the death be advised in an appropriate case to vary her own election in favour of the mother's house. There would be a problem if before the death she does not have an interest in the property which she occupies only as licensee.



(4) The expression "net proceeds of disposal" is specifically defined, whereas the ESC simply refers to "the proceeds of the house". Off the purchase price received must be knocked the incidental costs of disposal allowable as a deduction under s38(1)(c) even if because the whole gain is exempt there is no need to deduct them. It is specifically provided that in testing the 75% condition it is assumed that none of the sale proceeds are applied to pay IHT or to meet other liabilities of the estate.



(5) rather like paragraphs (a) and (b) of s225 in relation to trustees, simply explains how ss222 to 224 are to be applied in the case of a disposal by PRs. That is, it is the beneficiary's occupation that counts and any notice of main residence election or variation thereof is to be a joint notice by the PRs and the individual (or individuals).



(6) Again, relief for a disposal by PRs depends, as now for trustees, on a claim by the PRs for the relief.



Because the relief for PRs, now codified, remains more restrictive than that for trustees, it may be appropriate in certain cases to consider structuring a disposal by trustees (if necessary, with a deed of variation) if that will serve to maximise relief.

The new restriction on main residence relief in cases of a hold-over election (para 6: see Appendix B15-16 and B42-44)

This represents the "shock horror" guts of the new regime applying from 10th December 2003. The paragraph takes the form of introducing (a) new s226A which denies relief under s223 in certain cases where there has been a hold-over election and (b) new s226B which sets out a specified exception to the ambit of the new rule. So how does this new s226A work? There are seven sub-sections:



(1) applies s226A where s223 would apply to any part of the gain accruing to an individual [note] or trustees and where in computing the gain the allowable expenditure would be reduced in whole or in part directly or indirectly as a result of a s260 hold-over claim in respect of one or more earlier disposals (whether or not made to the individual or trustees now making the disposal).



(2) envisages the case where a s260 claim is made for the earlier disposals or, if more than one, any of them before the later substantive disposal by an individual. In this case s223 is wholly excluded from relieving all or part of the gain on the later disposal. That is, the gain is wholly taxable.



(5) provides that, where it is trustees who make the later disposal, then in looking in the order of events under (2), what matters in relation to the later disposal is not the actual disposal, but the claim for relief under s223 (that is, envisaging the case where all or any of the relevant s260 hold-over claims are made before the claim for s223 relief on the later disposal). Here the assumption for CGT purposes is that none of the gain accruing on the later disposal is relieved under s223.



(3) envisages the case where the s260 claim (or any of the s260 claims) is made after the later disposal by an individual. Again, the gain on later disposal is precluded from s223 relief. And, under (5), where trustees are concerned, it is the making of a claim for s223 relief that counts, not the disposal itself.



(4) provides for all adjustments to be made, whether by discharge or repayment of tax or the making of assessments, which may be required to give effect to s226A(3). The reason for this is of course that the apparent relief given to a later disposal under s223 can effectively be clawed back in the event of the making of a subsequent hold-over claim (which may be made at any time before the 1st February falling five years after the end of the tax year in which the relevant disposal was made: s43(1) TMA 1970).



(6) A hold-over claim which is subsequently revoked is treated as never having been made for the purposes of s226A. Within what period can a hold-over election be withdrawn? There seems to be little practical experience of the Revenue's view (and the lecturer could see no light on the subject cast in either the Manual or the text-books). It's unlikely to be something that happens very often, though these new rules may well change that. Generally, however, why shouldn't it be possible to withdraw an election within the five years and ten months or so period mentioned at (5) above, accepting the liability to interest on unpaid tax? Certainly, withdrawal of an election in these circumstances may well have some fairly messy, even if overall advantageous, CGT consequences.



(7) provides for the exception given in s226B. 226B applies in the fairly rarified case that the trustees had elected for income tax purposes that income of a maintenance fund for an historic building will not be treated as the income of the settlor, under s691(2) TA 1988. The condition for the exception to apply is that the election must have been in force for any year of assessment in which a "relevant earlier disposal" (that is, the one attracting the s260 hold-over claim) was made.



Note 39 of the Notes on Clauses (Appendix B44) comments that the new rule does not apply to settlements for disabled persons which might otherwise thought to be prejudiced. This is because a beneficiary under such a settlement is treated by s89 IHTA 1984 as having an interest in possession. Therefore on a disposal to such a settlement there can be no chargeable transfer capable of hold-over election under s260 TCGA 1992.

Commencement provisions (para 7: see Appendix B16-17 and B44)

The four sub-paragraphs in para 7 apply the new rules separately in relation to:



(1) Notices of main residence election given, viz on or after 10th December 2003.



(2) The making of disposals, viz on or after 10th December 2003.



(3) Subject to the transitional rules in para 8 (see 3.8 below), the references in paras 2(3) and 6 to gains accruing on later disposals are to gains accruing on disposals on or after 10th December 2003, (regardless explicitly of the date of any relevant earlier disposal and, implicitly, of the fact that the gain accrued over a period before 10th December).



(4) A "relevant earlier disposal" is one where a hold-over claim is made.

Transitional provisions (para 8: see Appendix B17 and B44-46)

There is (happily - one must be thankful for small mercies) a saving from the rigour of the new rules in a case where the gift into or out of trust or (if there were two or more of them which are reflected in the computation of the later gain), all of them occurred before 10th December 2003 - but the later disposal has not yet occurred. The way in which the transitional provisions work is by revising the wording of s226A in such a case by paras 8(3) to (5) - rather a complex way of proceeding as opposed to setting out in full the relevant provisions as amended.



Para 8(3) amends new s226A(2) by providing that in a case prima facie caught by the new rule where the earlier disposal(s) have occurred before 10th December, s223 will apply to give a measure of relief, subject however to the restrictions provided by para 8(4) and (5). The effect of these restrictions is to exclude from the computation of relief under s223 any otherwise relieved part of the period of ownership which falls within the "post-commencement period". This otherwise relieved part might have been due either to the property's having been the individual's only or main residence during that time or to falling within the last 36 months of the period of ownership. The effect therefore is to exclude any main residence relief in respect of any part of the period of ownership which occurs on or after 10th December 2003. A further modification to s226A is required by para 5 to 226A(3) which operates where a s260 hold-over claim occurs after the ultimate disposal by an individual or after the claim for relief by trustees. Here it is assumed that s223 did apply as modified to the pre-10th December 2003 gain.



Para 8(7), by construing para 8 as one with s226(A) ensures that any expressions used or defined in para 8 which also used or defined in s226A have the same meaning as they do in s226A.



The effect of para 8(8) is to bring the references in the new legislation within the Treasury power to amend the last 36 months concession to 24 months.

4. What does all this mean in practice?

The Notes on clauses give from paras 57 to 89 (see Appendix B47-53) six examples of how main residence relief works, whether in its simple form or as amended by the new rules. Delegates are referred to those examples which are not replicated in these Notes or in this lecture. Rather, one or two observations are offered (though others may be able to think of further practical applications).

The "dream scenario"

This is obviously the case where the gift of the second home into the discretionary trust under hold-over election AND the disposal by the trustees, whether to a third party for value or to a beneficiary (with no hold-over election) or out of the discretionary trust into some other form of trust (separate for CGT purposes under Roome v Edwards 54 TC 359 and SP 7/84 principles) occurred before 10th December 2003. This is even if for example the ultimate disposal occurred in tax year 2003/04 and the disposal has yet to be reported and the relief claimed. Subject to having avoided the "heffalump traps" in section 1.3 above, this will have been effective, whether (a) in terms simply of sheltering a gain on the second property in the case where settlor or spouse remain interested under the settlement or (b), to achieve a measure of IHT efficiency as well, the value concerned has effectively been passed down a generation. Once seven years have passed since the original gift, there are no longer any IHT implications (except perhaps for the possible application of the 7 + 7 = 14 years rule - that is, where a potentially exempt transfer which becomes chargeable is made within seven years after a chargeable transfer: the amount of the earlier chargeable transfer will fix computation of any IHT payable on the failed PET).

The transitional provisions

This is the case where one is "half way through" the arrangement, that is the gift into trust has been made but a disposal had not occurred by 10th December. In principle, the tax-efficient thing to do is to get the property out of the discretionary trust as soon as possible, thus crystallizing the gain in a small an amount as possible. However, the analysis will vary from case to case. Fair enough, if the property is going to be sold anyway and thus there may be cash available to pay any CGT. However, if the figures are such that, even with time apportionment only since 10th December, a significant gain arises and there is no general wish to dispose of the property outside the family, this may be thought less desirable. On the other hand, there is also an argument for triggering a disposal before 6th April 2004 when the tax rate for trustees will rise from 34% to 40%. Consider the following example.

Example

Freddie and Fenella took advice on CGT mitigation for their country cottage owned as tenants in common in equal shares and now worth £600,000. Each of them made a discretionary settlement on 10th March 2003 transferring to the trustees his/her half share therein then valued at £250,000 and holding over the gain in each case of £150,000. Settlor and spouse are not excluded from benefit under the settlement. Their 23-year old son Geoffrey has been occupying the cottage as his main residence since 1st June last year. The property is now worth £600,000. The family has no particular wish to sell nor Geoffrey to lose his present home. What happens with a sale on say 10th March 2004? Let us suppose that this is an advance out of each settlement to Geoffrey personally, on the footing that he will fund any CGT and thereby become a settlor of the settlement (albeit somewhat academic, as this would not occur until 2004/5).

Disposal proceeds				£300,000
Less Acquisition cost		£250,000
Held-over gain		(£150,000)
		£100,000
				(100,000)
Chargeable gain				£200,000*
Of which
Main residence relieved
(including last 36-months rule)		275		(150,685)
		365
Chargeable		90		49,315
		365
Less Annual exemption, say				(3,950)
Taxable gain				£45,365
Tax payable at 34%				£15,424*

*Less a bit for incidental costs of acquisition and disposal



Clearly, the longer the period of beneficiary occupation before 10th December 2003, the better. Equally, the longer that the trustees hang on, the worse the position becomes and any chargeable gain on disposal following 5th April is taxed at 40%, pushing up the tax cost in our example to £18,146.



Note that on existing cases there may be a possibility of either revoking a hold-over election already made or failing to submit an election so as to enable main residence relief on ultimate disposal by the trustees, subject to a claim by them. But consider the pros and cons. Such a revocation (or failure to submit an election) is possibly unlikely to help where the gains are very substantial, but consider that the reinstatement of a CGT event for the settlor may:



- benefit from the personal annual exemption;

- be taxed at less than 40% eg 10% and/or 20%; or

- alternatively, all be taxed at 40% (with no exemption) with the cash plus any interest having to be found now.

Mitigating the gain on the second home

What options are left? Part of the attraction of holding over a gain into a trust, even if ultimate disposal out of a trust is going to be taxable, is that the liability to CGT will be deferred - even if as we now know the rate moves up from 34% to 40% - a "bird in the hand ...".

Trustee ownership gains chargeable

However, the "sting" in the new rules is that, not only is any held-over gain prevented from benefiting from main residence election, but so also is any future gain accruing in the hands of the trustees. If in the scheme of things the gain in the trustees' hands forms the lion's share of the ultimate gain, it may be better to bite the bullet and pay the tax on the way in in order to secure the relief on the way out.

They get you both ways

The new rules catch (unsurprisingly) the case where the gains had been held over on going into and coming out of a settlement in favour of an individual who then occupies as his/her main residence and seeks to claim s223 relief. That is, under an existing structure it is not generally open to take the property out of trust under hold-over election. Problems in this sort of case are generally going to be those of cash flow if the property is not sold for cash and disposals are triggered by way of gift.

Nil-rate band discretionary trusts survive in principle

Given that in a particular case a discretionary settlement cannot be regarded as a simple "conduit", i.e. leaving the property in much more than the statutory minimum three months (to secure a "quarter" for IHT purposes), there remains nothing in principle to stop property of any description going into and then subsequently coming out of a discretionary trust (assuming that, if the value has increased to exceed the nil-rate band, the exit occurs within the first ten years to avoid a ten-year anniversary charge).



Accordingly, given a second property used as a holiday home and there are say within the family unit two parents, two grown-up sons and a daughter and a total of ten grandchildren, that gives you 15 annual exemptions to play with. In 2004/05 this should allow £120,000 or so of gains to be sheltered by annual exemptions and particularly in the case of the grandchildren a possibility of CGT applying at lower rates. However, if the property is sold by bare trustees for 15 individuals having been advanced out of trust with the appropriate documentation, the Inspector might well want to see the net sales proceeds applied for the maintenance, education or benefit of the respective beneficial owners - ie not just simply finding their way mysteriously back into the pockets of the original settlors - even if they say "we'll see our grandchildren right".

The last 36 months rule and the importance of electing,

Finally, what the new anti-avoidance rule does is bring back into sharp relief the benefit of the last 36 months rule, provided that at some time in the period of ownership of the particular property it has been whether by fact or by election the only or main residence. Application of the rule may not wholly get rid of gains on two residences but it can sweeten the pill to a considerable extent. See Malcolm Gunn's article in Taxation 28th August 2003 on some aspects of the main residence election, including the very interesting example given in the Manual (CG 64512) that the variation of an election could well assume a period of occupation of no more than one week.



Consider the following example.

Example

Hector and Hermione have lived at High Trees, Hector's family home, since they were married in the mid-1970's. In 1995 they bought a two-bedroom London flat for £500,000 which both they and other members of the family use as a residence. They did on 1st January 1996 submit a main residence election in favour of High Trees, (which arguably they shouldn't have done as, if any of the properties were going to be sold at a gain in their lifetimes, it would have been the London flat). They now realise that they want to sell the London flat now worth £1 million to divvy out a bit of cash to each of their three children to set them up in bricks and mortar. They can vary the election with retrospective effect for the last two years, so that when they do sell the London flat a decent proportion of the gain (three-ninths or one-third) will attract relief.



None of the above might be rocket science or perhaps terribly exciting, but there will remain ways to chip away at the size of the potentially quite large gains which may arise in future.



Matthew Hutton MA, CTA (Fellow), AIIT, TEP and Sharon Anstey LLB (Hons), CTA (Associate), IAC are the authors of the Book Stamp Duty Land Tax available (in both electronic and printed form) by subscription on www.mckieandco.com or from mhutton@paston.co.uk