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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, highlights a point concerning the extent of capital gains tax only or main residence relief.

Context

A residence subsidiary to the principal dwelling-house (typically occupied by a gardener or other retainer) will attract relief on sale as a part disposal if it can be shown to be within the curtilage of the principal dwelling-house. In Lewis v Rook [1992] STC 171 the CA held that, where there is an identifiable main house, a subsidiary building can form part of a dwelling-house with the main house only if it is appurtenant to and within the curtilage of the main house.

The shorter Oxford dictionary defines ‘curtilage’ as: ‘a small courtyard or piece of ground, attached to a dwelling-house and forming one enclosure with it.’ The Courts have adopted this definition in non-tax cases, with emphasis typically placed on the smallest of the area comprised in the curtilage [though see below]. Certainly the Inland Revenue 1994 Tax Bulletin article pressed the smallness point, requiring one to consider whether there is a close geographical relationship between the main and the subsidiary buildings. Buildings which are within the curtilage of the main house will pass automatically on a conveyance of that house without having to be specifically mentioned. That said, HMRC have stated publicly that in many cases a garage can be considered to be part of the dwelling-house if it is near the residential accommodation and is bought and sold together with it (even if outside the curtilage and separated from it by land and buildings not owned by the taxpayer).

The importance of establishing the curtilage

HMRC have offered two examples in which the extent of the dwelling-house is important.

First, if there is a sale of any part of the garden or grounds, whether together with or separate from the main house, it may be important to determine which buildings can be regarded as making up the entity which is the dwelling-house. The ‘permitted area’ is defined in TCGA 1992 s222(3) in terms of ‘the size and character of the dwelling-house’, so the inclusion of particular buildings within the entity of the dwelling-house may require an alteration in the area of garden or grounds attracting relief. So for example, inclusion of a stable as part of the dwelling-house may enable an area of paddock or grazing for horses to be treated as part of the permitted area.

Second, the permitted area of garden or grounds which qualifies for relief is defined as an area inclusive of the site of the dwelling-house. This may mean that the inclusion of a distant outbuilding as part of the dwelling-house will result in the land between the distant outbuilding and the main house being included in the permitted area.

(Taxation 2.2.06 p445, article by John Hiddleston, a tax director of Vantis Tax Ltd)

The above said, however, the curtilage need not be small

There was a significant CA decision in the non-tax case of Secretary of State for the Environment v Skerritts of Nottingham Ltd [2001] QB 59. In that case Robert Walker LJ made a careful analysis of the earlier cases on the meaning of ‘curtilage’ with which both the other judges agreed. He considered the earlier non-tax cases (relied upon in Lewis v Rook) and decided that they went too far ‘in expressing the view that the curtilage of a building must always be small, or that the notion of smallness is inherent in the expression’.

He recognised (for example) that something which could be described as a ‘principal mansion house’ under the Settled Land Act 1925, would include within its curtilage stables and other outbuildings.

He went on to say that ‘the curtilage of a substantial listed building is likely to extend to what are or have been, in terms of ownership and function, ancillary buildings… physical layout comes into the matter as well. In the nature of things, the curtilage within which a mansion’s satellite buildings are found is bound to be relatively limited. But the concept of smallness is, in this context, so completely relative as to be almost meaningless and unhelpful as a criterion’.

This means that one of the most important sections of the previous Inland Revenue Interpretation, namely that the curtilage has to be small, is no longer good law. Much more important tests are whether the buildings have been in the same ownership, and have been used for the purposes of the house, for a long time.

The decision has been considered recently in the planning case of Ray Wheeler v First Secretary of State [2003] EWHC 1194. The judgement dealt also with the earlier case of Sinclair-Lockhart’s Trustees v Central Land Board [1951] I P&CR 195 where it was said that ‘ground which is used for the comfortable enjoyment of a house or other building may be regarded in law as being within the curtilage of that house…’. The judge in Ray Wheeler pointed out that the grounds or building need not serve the enjoyment of the house in some necessary or reasonably useful way, but could still fall within its curtilage.

Application

The net result is that ‘curtilage’ is not a term of art but a question of fact and degree; it need not be small, and the HMRC interpretation may well be too restrictive to be sustainable.

(Taxation 16.2.06 p512, letter from Jeremy Heal of Howes Percival)

April 2006

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.

THE FIFTH ESTATE PLANNING CONFERENCE: CURRENT ISSUES 2006

East
Tuesday 13 June
Cambridge Belfry Hotel

Midlands
Tuesday 20 June
Sketchley Grange
Burbage, Hinckley

South
Tuesday 27 June
Norton Manor Hotel,
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nr Winchester

West
Thursday 14 September
Bailbrook House, Bath

North
Tuesday 3 October
Weetwood Hall, Leeds

London
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