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Matthew Hutton MA, CTA (fellow), AIIT, TEP, author of Capital Tax Review, comments on a recent change of view by HM Revenue & Customs, and explains why he considered their original view to have been incorrect.     

Matthew Hutton

Context

HMRC have announced a change in their view, so that lettings relief can apply in a dependent relative relieved case.  HMRC have amended the guidance in their Capital Gains Manual where a private residence is occupied by a dependent relative before 6 April 1988.

HMRC’s revised view

A private residence occupied by a dependent relative before 6th April 1988 may qualify for private residence relief for CGT purposes: see the Capital Gains Manual at CG 65550 onwards.

CG 64718 used to explain that in such cases the further relief provided for by TCGA 1992, s 223(4) where the residence has also been wholly or partly let out as residential accommodation (‘lettings relief’) will not be due. CG 64718 has been amended to reflect HMRC’s change of view that lettings relief may be due. HMRC have also withdrawn CG 65562 which said that lettings relief is not due where private residence relief is given on a residence occupied by a dependent relative.

If taxpayers wish to amend their 2005/06 returns they must do so by 31 January 2008. Taxpayers who have already filed their 2006/07 returns have until 31 January 2009 to amend their returns. If there is an open enquiry into a return and HMRC are able to amend it at the conclusion of the enquiry, they will amend it to reflect their current view.

HMRC’s previous published view was widely accepted [not by me, it wasn’t!]. Therefore, if taxpayers are no longer able to amend their returns, it will not be possible to adopt the revised view for the tax year in question by making a claim for error or mistake relief (in accordance with TMA 1970, s 33), as the return will have been made in accordance with the practice generally prevailing at the time.

(HMRC news release 1 August 2007)

Comment 

The view from which HMRC have recanted used to be a strongly held one, but to my mind always wrong.  It was the 9 December 2003 pre-Budget Report which effectively hoisted HMRC by their own petard. The express extension of the lettings relief to a trustee situation was removed from TCGA 1992, s 223(4) as being ‘unnecessary’ (the statutory word in FA 2004, Sch 22 para 2(2)).  The reason always given by HMRC for not allowing lettings relief to dependent relative relief cases was that there was no express reference to such cases in s 223(4), by contrast with trustee cases. But then the rug was pulled from under that argument – though it has taken the best part of 4 years for HMRC to appreciate the point!

FA 1988, s 111 generally withdrew the relief following 5 April 1988, except in a case where s 226 relief would have been available as at 5 April 1988 but the taxpayer had not yet disposed of the house.  However, full relief depends upon continued occupation by the particular relative.  Should the relative leave the property the relief will still be cut down on disposal even if he or someone else who would qualify subsequently takes up occupation.  There is one qualification to this; relief will not be restricted if the relative leaves the property before sale where the reason is admission to hospital (see the discussions between the Inland Revenue and Institute of Chartered Accountants in England and Wales on Finance Bill 1988 published in TR 739 paragraph 65).  However, if the relative does leave, the effect of TCGA 1992, s 226(3) is merely to disregard any period of residence following departure for the purposes of s 226(2) relief.

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