Replies to Queries - 1 - Dependent relatives?

A residential property has been owned since before 5 April 1988 in equal one-third shares between two aunts and my father. Both aunts were over 65 years of age on 5 April 1988 and had lived in the property as their main residence since its acquisition.

On my father's death (post 5 April 1988), my sister and I acquired his share equally. The first aunt died, and left her share of the property as follows: one-half to the other aunt, one-quarter to my sister and one-quarter to me. The second aunt continues to live there. Neither my sister nor I have received rent from either aunt for the use of our shares in the property. When the second aunt dies, she is likely to bequeath her share of the property to us.

Can we claim dependent relative relief for capital gains tax purposes when we dispose of the property sometime in the future?

(Query T15,996) - Supportive.

The question is whether because at 5 April 1988 the brother and sister did not have an interest in part of the property, whether their subsequently inherited holdings qualify them for the relief concerned.

Under section 226(1), Taxation of Chargeable Gains Act 1992 the rules are that dependent relative relief may be claimed against a gain arising from a disposal of, or part of, a property that has been occupied by a dependent relative of the disposer, with the period of occupation, as a principal private residence, beginning before 6 April 1988 and was rent free and without any other consideration. Also relief under section 223(1) regarding the last 36 months of ownership may be taken into account, whether occupied by the dependent relative or not. Therefore the actual wording of the legislation does not seem to imply that in this case the brother and sister must have owned all or part of the property at 5 April 1988.

However, the Revenue's Capital Gains Manual at paragraph 65670 gives us its interpretation of the terms and conditions: 'For disposals on or after 6 April 1988, relief is available if

Then in paragraph 65763 it states: 'This limitation to dependent relative relief was introduced in the 1988 Finance Act and, in effect, closes the class of qualifying properties at 5 April 1988 … Relief will continue to be due to anyone who had provided a dwelling house to a dependent relative before 6 April 1988 in respect of that dwelling house as long as it is occupied by that dependent relative. So to that extent, dependent relative relief can still arise after 6 April 1988'.

Therefore, based on the Revenue's interpretation of the legislation, as the brother and sister did not qualify for the relief before 6 April 1988, even though it could be said they perhaps inherited it, then they will not qualify for the relief when they dispose of the property. - N.K.

On the face of it, claims by 'Supportive' and his sister for dependent relative relief under section 226, Taxation of Chargeable Gains Act 1992 on a future sale of the property appear unlikely to succeed.

It will be recalled that, in summary, exemption can be claimed for capital gains tax purposes in respect of one private residence provided for a dependent relative rent free and without any consideration; the exemption was withdrawn for disposals after 6 April 1988 except where the property was the sole residence of a dependent relative on 5 April 1988 or some earlier time, and continued so to be to the date of the disposal.

The difficulty for 'Supportive' and his sister is that their inheritance of shares in the property from their father and aunt occurred after 6 April 1988.

Looking at the father's share first, the interpretation of section 226 applied by the Revenue (as detailed in its Capital Gains Tax Manual at paragraphs 65550 to 65681) is to allow the relief to an individual who had incurred the expense of providing a dwelling house for a dependent relative of that same individual on or before 5 April 1988. Whilst one would accordingly have expected that section 226 relief would have been available to the father in respect of his property share on a disposal after 6 April 1988, the relief does not carry through to 'Supportive' and his sister. So, whilst the aunts may have been 'dependent relatives' of 'Supportive' and his sister at 5 April 1988, this did not coincide with simultaneous ownership of the relative property interest - at that point with their father - and it is this coincidence that is needed where an individual claims the relief on a disposal after 6 April 1988. In the terms of section 226(1) it is clear that the individual who realises the gain must be one and the same as the individual on whom the 'dependent relative' relationship at 5 April 1988 is predicated.

As for the first deceased aunt's property share, one would expect the Revenue to argue that section 226 relief was not in point at 5 April 1988 for that property share, the share presumably at that time having the benefit of main residence relief for the first aunt. Again therefore ownership of the relative property share only coincides with the surviving aunt being a 'dependent relative' of 'Supportive' and his sister after 6 April 1988 with the result that the conditions for operation of the relief in section 226(1) have not been satisfied. - Digby Bew.

Extract from reply by 'M.C.N.':

As regards the expression 'provided', the Readers' Forum replies to Query T14,951 led to a 'You Said It' response in Taxation, 29 May 1997 at page 253. There, the Inspector at first denied that a house had been provided where the claimant had acquired it by a gift, not by purchase, but later gave way. See also replies to Query T15,958 in Taxation, 21 February 2002 at pages 507 to 508.

Editorial note. The wording of section 226(1) is perhaps a little ambiguous, but the reference to '5 April 1988, or at any earlier time in [the individual's] period of ownership' lends some support to the Revenue view.

Issue: 3855 / Categories: