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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 potential effect of the pre-owned assets tax on the occupation of holiday homes.

Context

An individual (or, perhaps, even better, a married couple – given the two £5,000 de minimis exemptions) might have satisfied either the disposal or the contribution condition in relation to a family holiday home which they use from time to time. Let us say a gift has been made, for simplicity, to one or more of the children (or, perhaps, to trustees for the grandchildren – though different consideration might then apply). Could there be a POA issue? ‘It all depends on the facts’.

GWR or POA?

One hopes that the answer is ‘neither’; of course, it can’t be both.

(i) Is there occupation?

Before turning to the co-occupation exemption from both regimes, consider whether there is ‘occupation’ in the first place. In their technical guidance (see CTR Issue 10 Item 5) HMRC have expressly applied to POA RI 55 issued in November 1993 in relation to GWR. That states that there will be no GWR issue if the donor occupies the property either with the donee for periods which do not exceed one month in the year or, in the absence of the donee, for periods that do not exceed two weeks in the year. Occupation is apparently determined by nights spent in the property.

In addition, of course, for POA HMRC are applying the test that storage of possessions or maintenance of the sole means of access also constitutes occupation, even when not physically present. The storage point could perhaps be successfully challenged. At all events, for a quiet life, it would be sensible to ensure that no furniture or other possessions in the property were owned by the donor(s) and that, when not in residence, a key (even if not the sole means of access) is returned to the donee or his agent.

(ii) The co-occupation exemption

As to this exemption provided for GWR in FA 1986 s102B(4), note that s102B(3)(b) provides a let-out if the donor’s occupation is exclusive and for full consideration in money or money’s worth. Sub-para (4) envisages both donor and donee occupying the land (which, as against the 1986 Hansard concession, does not necessarily imply that such occupation is joint, ie it could be successive) and the donor receives no benefit other than a negligible one which is provided by the donee in connection with the gift. Satisfaction of the last condition can be met simply by (if appropriate) the donor paying all the property expenses. If expenses are shared, then careful attention needs to be given to the detail and to the evidencing documentation, as this is a point known to be closely regarded by HMRC.

For POA purposes the co-occupation exemption is imported by FA 2004 Sch 15 para 11(5)(c). Note, however, that both that and the full consideration exemption provided by para 11(5)(d) seem to assume that the original gift was of the interest in land, ie that it is the disposal and not the contribution condition which has been satisfied.

The final point in relation to GWR and s102B(1) is that that sub-section refers to a disposal by gift ‘of an undivided share of an interest in land’. That seems to assume that following the gift donor and donee both share ownership as tenants in common in undivided (though not necessarily equal) shares. And HMRC have been known to argue that s102B does not apply in the case where the individual disposes of his entire interest in the land: beware of this point.

(iii) The £5,000 de minimis let-out

Suppose that neither the de minimis occupation nor the co-occupation provisions apply, what about the £5,000 de minimis? This should in many cases be possible to ensure for POA purposes, having regard to para 4 of Sch 15 and the open market rental on a landlord’s repairing basis.

The reference in para 4(1) to the occupation of the land by the chargeable person suggests that the appropriate rental value is computed for the actual weeks occupied, ie whether high, mid or low season. The argument it seems to me derives from the definition of ‘the taxable period’ in para 4(6) of Sch 15. That is, it is the part of the year of assessment during which para 3 applies to the chargeable person. The reference to part of a year of assessment surely envisages that the occupation may be for less than the whole year. Para 3 applies only where the chargeable person occupies the relevant land and the disposal or the contribution condition is met. Then, under para 4, the chargeable amount in relation to the relevant land is the appropriate rental value as defined ‘for any taxable period’.

Of course, if no POA, consideration then needs to be given as to whether or not there is a GWR! At least then, where it is the contribution rather than the disposal condition which is in point for POA, tracing for GWR (though not for POA) purposes stops with cash (FA 1986 Sch 20 para 2(2)(b)).

Comment

The three levels of analysis by way of response assume that the donor is not prepared to pay for his or her occupation of the property. If he/she is, then of course the possibility of both GWR and POA can be neatly kicked into touch by ensuring that full consideration is paid (for POA purposes, under a legal obligation). The important point then becomes to ensure that what is paid is in fact full consideration – and that the recipient remembers to put it on the tax return and to pay the tax!

IHT issues involving holiday homes and GWR/POA issues are likely to crop up quite a bit.

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.

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

For further details, brochures and booking forms please contact Matthew Hutton: email – mhutton@paston.co.uk or telephone – 01508 528388.