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Replies to Queries

12 January 2005
Issue: 3990 / Categories:

C.G. or not C.G?

Our new client, Mrs X, and her common law husband Mr Y, purchased a flat for £41,000 in December 1991, in which they resided for three years. Sadly, the relationship soured to the extent that Mrs X had no alternative but to move out and rent accommodation elsewhere. Mr Y remained in occupation until the sale of the property in October 2004, for £87,000.

C.G. or not C.G?

Our new client, Mrs X, and her common law husband Mr Y, purchased a flat for £41,000 in December 1991, in which they resided for three years. Sadly, the relationship soured to the extent that Mrs X had no alternative but to move out and rent accommodation elsewhere. Mr Y remained in occupation until the sale of the property in October 2004, for £87,000.

During this time, Mr Y was mainly unemployed and took in a lodger (rent was below the rent-a-room limit). Rent was often not paid and, in fact, Mrs X had to pay £2,000 to the lodger to evict him prior to the sale of the flat.

During the period of occupation by Mr Y, mortgage arrears had also built up on his share of the repayments, which Mrs X also paid. There was also a problem, during the interim, of a negative equity situation which contributed to the delay in settling the acrimonious parting and eventual property sale.

It has been decided that Mrs X will receive the proceeds from the sale, apart from £10,000 which Mr Y will receive. My client is a 40% taxpayer; Mr Y is living on benefits. There has been no other property owned by either party throughout the period.

I believe there is no charge to my client for CGT purposes as the property has still been her main residence throughout, the Inland Revenue's Extra-statutory Concession D6 would appear to help taxpayers in such situations.

Do readers agree? Is any report required on the 2004-05 tax return to advise this disposal? Although my client is a 40% taxpayer, no returns have been issued to date as the correct deductions have been made under PAYE and there is no other income to declare. What could be the worst case scenario if this disposal needs to be returned and a capital gains computation is required?

(Query T16,536) — Posham.


'Posham' appears to have reached a conclusion that his client has no gain to report, but I am not sure that this is for the right reasons. The Inland Revenue's ESC D6 deals with the CGT position on the sale of the home where husband and wife split up and one spouse leaves the home before it is sold.

Here, 'Posham's client, Mrs X, was never married to her partner Mr Y (the term common law husband is not recognised in tax). I think it would be dangerous to rely on that concession covering this case.

We are not told the proportions in which the couple bought the property back in 1991. In the lack of any other evidence, if it was bought jointly, then ownership in 50:50 proportions may be assumed. Tax Bulletin 3 of May 1992 covers the situation when property is owned jointly by persons who are not husband and wife. The Revenue's view is that each will generally have an undivided share in all of the property, and provided that it is their only or main residence, CGT relief under TCGA 1992, s 222 will be available on each owner's share of any gain on disposal in the normal way.

Following this analysis, it will be necessary to work out the gain that arises under normal CGT rules, and then see what exemption is afforded by the main residence rules.

Mrs X will have a capital gain based on one half of the sale proceeds, i.e. £43,500. Her base cost to set against this will include one half of the cost of the property, together with indexation from December 1991 to April 1998. She also appears to have incurred additional costs of £2,000 in ridding the property of the recalcitrant lodger in order to obtain vacant possession and this should be an allowable expense of the sale.

The property was her only main residence for the first three years of ownership until she moved out in December 1994. Assuming no other period of absence can be counted, the last 36 months of ownership can be added to this to give a total of 72 months out of the total of 154 months of ownership which will fall into the exemption.

The taking in of a lodger may or may not attract 'letting relief', the availability of which is expanded in Statement of Practice 14/80. This applies where part of the property is let out, just as much as where the whole property is let. Reading the query, it would seem that the lodger was taken on to help meet the mortgage payments rather than the 'living as a member of the owner's family' type described in the statement. We are not told how much of the property was let out, but as Mrs X has a share of the whole, she must have let out a proportion of that share. Therefore it should be sustainable to argue that she is entitled to the letting exemption of the lower of the gain remaining in charge and £40,000.

Taken together, this will eliminate Mrs X's gain otherwise chargeable to tax. The annual CGT allowance should not need to be troubled.

Regarding the final settling up between Mrs X and Mr Y of the actual proceeds, and the paying off of the mortgage, this must amount to a personal arrangement between them and so not have any direct bearing on the CGT treatment. The transaction should be returned on the 2004-05 tax return and the reliefs claimed along the lines suggested. — Edmund.


There are three key issues to analyse here. First, the question of ownership of the property (as distinguished from the financing of the purchase) must be addressed so as to attribute the gain proportionately between Mrs X and Mr Y. Presumably the property was purchased jointly with equal liability under the mortgage. If so, the ownership — and so the apportionment of the gain — on sale remains 50:50, unless any documentary evidence exists to show that Mrs X's settlement of Mr Y's mortgage arrears was in exchange for an increased interest in the property. So Mr Y, having lived in the property throughout, gets CGT main residence relief under TCGA 1992, s 223(1) and no tax is due on his 50% share of the gain. The fact that he is passing a substantial proportion of his share of the proceeds to Mrs X appears to be in settlement of her financing assistance in clearing his mortgage arrears.

Secondly, we must look at the question of Mrs X's residence for CGT main residence relief. Looking at the 13-year ownership period, Mrs X has three years of actual residence which is exempt from CGT under TCGA 1992, s 223(1). In addition, under TCGA 1992, s 223(1), the last three years of ownership of a property which at some time has been the taxpayer's main residence are also exempt regardless of whether the taxpayer was in residence during that period or not. The intermediate seven-year period does not qualify for relief under these provisions. The fact that the property had previously been Mrs X's home does not qualify it as her main residence for this later period when she was not in occupation. As she did not subsequently re-occupy there can be no 'deemed' period of occupation covering part of her period of absence, per s 223(3). As she has not lived there since 1994, then clearly it was not a residence in consequence of occupation for the latter period. Extra-statutory Concession D6 only applies on the dissolution of legal marriages, not to common law marriage, and so does not help here.

Thirdly, some help might be expected from the residentially let property relief under s 223(4). However, the letting — to the extent that it has actually taken place, which is not clear from the lack of rents paid — has been made by Mr Y, rather than Mrs X, as no mention is made of Mrs X contracting jointly for or receiving a share of any rents actually paid. So this relief, which can be up to £40,000 per letting property owner, is not available to Mrs X.

Prima facie, Mrs X has a gain in respect of the 7/13 of the period which does not qualify for relief as above. But all is not lost. Her 50% share of the gross gain is £23,000 — only £19,000 after indexation relief (up to 5 April 1998). 6/13 is exempt under the main residence reliefs, leaving £10,000 unrelieved. Taper relief, inclusive of the bonus year for property held at 17 March 1998, relieves a further 25% leaving a £7,500 gain. If Mrs X has no other gains in 2005, her annual CGT exemption of £8,200 will more than cover her entire chargeable gain. Altogether, this is a less bitter pill than at first taste. — Hiatus.

Editorial note.

As can be seen from these replies, there was some difference of opinion as to whether Mrs X would be eligible for the lettings relief under TCGA 1992, s 223(4). That section refers to a gain in respect of a property that has 'been wholly or partly let by him ...'.

As a joint owner of the property, one would normally expect Mrs X to have been involved in any letting, although the position here is a little unusual and the arguments seemed to be centred on whether it was simply that the property had been let, so that Mrs X as a co-owner would be entitled to relief, or whether it would actually have been necessary for her to have been involved in the letting.

However, was part of the property let at all? The Revenue's Capital Gains Manual at CG64700 states that where a lodger lives with the owner, the main residence relief under TCGA 1992, s 222 should not be restricted. This is good news for Mr Y, but perhaps not so good for Mrs X.

The Inland Revenue's comments at CG64703 are also interesting.

'The reference in CG64702 to a lodger is important. The domestic arrangements of individuals are endlessly variable and you must aim to operate the statutory code flexibly and fairly. A distinction was intended by the Statement of Practice between a person who takes a single lodger into their home and a person who is running a lodging house as a business. The [main residence] relief available to the latter should be restricted. The Board considers that the number of lodgers is a sensible and practical way of distinguishing between these two cases. So you should not consider any restriction of relief where there is a single lodger, but should restrict the relief to an appropriate extent where there is more than one lodger. If relief is restricted, a further relief may be due under TCGA 1992, s 223(4).'

Presumably, Mrs X could argue that as she was not using the flat as her main residence and was not entitled to relief under s 222, she should be entitled under s 223(4) as her share of the property was effectively let. Unfortunately, this leads us back to the start of the argument about whether it was 'let by her'. This could also lead to the apparently rather odd situation in which Mr Y's relief is under s 222, whereas Mrs X's relief is under s 223(4).

Depending upon the share of the property owned, indexation and taper reliefs and whether there were any other gains in the year, this question may be academic. Perhaps we should hope so.

Query — C.G. or not C.G?


The Inland Revenue's Extra-statutory Concession D6 refers to married couples. If Mr Y and Mrs X were not married then it cannot apply to them. Hence 'Posham' will need to consider the capital gains analysis.

The worst case scenario is that Mrs X has a gross capital gain of £77,000 proceeds less £20,500 of base cost, i.e. £56,500. Indexation relief of £4,059 (0.198 x £20,500) is available for the period from December 1991 to April 1998, thus reducing the gain to £52,441. Taper relief (six full years plus one bonus year at the non-business asset rate) reduces this by 25% to £39,331.

The property was owned for 148 months, of which Mrs X was in actual occupation for 34 months. The actual period of occupation and the final 36 months are tax free. Hence 70/148 x £39,331 = £18,602 of the gain is exempt, leaving £20,729 as the taxable gain. It is assumed that Mrs X can use her CGT annual exemption of £8,200 leaving a tax liability of 40% X (20,729 — 8,200) = £5,011.60.

If Mrs X did not live in the property after 1994 it is difficult to see how it could be her main residence for subsequent periods. 'Posham' should obtain further details of the letting to see if any letting relief is due under TCGA 1992, s 223(4).

Mrs X should request a tax return and disclose the capital gains computation. Failure to do so may result in interest and/or penalties.

Issue: 3990 / Categories:
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