Henke v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 02 May 2006 |
| Date | 02 May 2006 |
| Court | Special Commissioners (UK) |
special commissioners decision
John Clark
Anthony J Henke in person for the Appellants
Bob Kelly of the Central England Appeals Unit, HM Revenue and Customs, for the Respondents
Capital gains tax - purchase of plot held for some years - subsequent construction of only or main residence - later disposals of two plots - what deductions allowable - extent of "permitted area" - whether period of ownership began with construction of residence or acquisition of land - whether apportionment necessary - details submitted on Forms R40 and SA108 - whether "returns" - whether enquiry properly commenced - whether assessments valid - whether enquiry for following year valid
1. This appeal concerns capital gains arising on the sale of two plots from a larger plot on which Mr and Mrs Henke had previously constructed the house which became, and continues to be, their principal private residence. The principal issues to be considered are:
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(2) the validity of discovery assessments made on them in respect of the year 1999-2000;
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(3) the validity of the enquiry into their 2000-01 self assessment returns;
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(4) the costs to be allowed against the sale proceeds from each plot in the computation of the chargeable gains;
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(5) the size and location of the "permitted area" in relation to the principal private residence;
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(6) whether any private residence relief in relation to the sales of each plot needs to be restricted to exclude the period between the date when the land was acquired and the date on which the house became their only or main residence.
2. The factual material before me was very extensive. In addition to a lengthy statement of facts not in dispute, there was an agreed bundle of documents. Mr Henke submitted various Reports containing a mixture of factual material and argument; these were dated December 2000, July 2004 (together with two binders containing a large number of appendices), January 2006 (also containing his submissions for the hearing), and an Addendum dated February 2006 containing his response to the Expert's Report. At the hearing, Mr Henke responded to various questions put to him by Mr Kelly. The only other oral evidence at the hearing was that of Mark Catley, District Valuer, East of England, who presented his Expert's Report in detail and responded to questions from Mr Kelly and Mr Henke. The following sets out the principal elements of the factual evidence.
3. Mr and Mrs Henke jointly purchased a freehold plot of land at Houghton, Huntingdon on 25 August 1982. The purchase price was £20,000, with legal costs of £289. After fencing the plot it was found to comprise 2.66 acres. At the time of purchase outline planning permission had been granted for one house to be built on the plot; a permanent covenant was in place under s. 52 of the Town and Country Planning Act 1971 restricting development to only one house being erected on the plot.
4. In September 1990 David Pitts, an architect and practising member of the RIBA, was instructed to design a house to be built on the plot, to be known as Old Oak House. In December 1990 detailed planning consent was applied for; the application included a landscaping plan for the whole 2.66 acre area of the property. Permission was granted on 21 February 1991; development had to commence within five years of that date.
5. On 28 February 1991 construction work on the foundations of Old Oak House commenced. By a deed dated 10 December 1991 (executed on 3 February 1992) the s. 52 restriction was lifted. (This did not affect the existing planning permission for Old Oak House; the release merely made it possible for further planning applications to be made.) Old Oak House was built between June 1992 and June 1993 at a main contract cost of £238,537. On 12 May 1993 the whole 2.66 acre property was mortgaged to secure a loan of £60,000. Mr and Mrs Henke took up residence in Old Oak House in June 1993 and have continued to occupy it ever since. The house is substantial, having approximately 4,500 square feet of living accommodation; it has a large garage block of approximately 1,000 square feet within its curtilage.
6. Between acquiring the plot in 1982 and 1987, Mr and Mrs Henke lived in an owner-occupied property in Hilton, Huntingdon, which was sold for £160,000. From 1987 until 1992 they lived in an owner-occupied property at St Ives, Huntingdon; this was bought for £102,000 and sold for £116,000. From October 1992 until moving into Old Oak House, they lived in a rented unfurnished property in Cambridge.
7. On 18 July 1995 detailed planning permission was granted for two dwelling-houses to be built to the front of Old Oak House, on plots within the 2.66 acre plot. Subsequently, each of the plots was sold (see below), but in each case the plot to be sold was maintained until the time of sale as part of the garden and grounds of Old Oak House.
8. On 15 October 1999, "Plot 1" was sold for £171,000; the proceeds were divided equally between Mr and Mrs Henke. The area of Plot 1 was 0.54 of an acre. Out of the proceeds, the £60,000 mortgage was redeemed. Subsequently a residential house was built on Plot 1.
9. On 15 March 2001, "Plot 2" was sold for £230,000, the sales proceeds being divided equally between Mr and Mrs Henke. The area of Plot 2 was 0.54 of an acre. A house was subsequently built on Plot 2.
10. Having regard to their income, Mr and Mrs Henke normally completed Forms R40 to give details of their income to the Respondents (referred to for all times covered by this decision as "HMRC") in order to reclaim tax deducted at source from their income. On 15 April 2000 they completed Forms R40 for the year ended 5 April 2000. Each of them ticked Box B on page 1 of the form to indicate that they had disposed of assets for more than twice the annual exempt amount for capital gains purposes. Box B of the form contained the words "Tick this box and we will send you a form R40(CG) to complete." They submitted these forms to HMRC's Bootle office.
11. HMRC dealt with the repayment claims by sending repayment cheques in May 2000. However, there was no further communication relating to capital gains. As no response had been received by August 2000, Mr and Mrs Henke contacted the Huntingdon Tax Office for advice. As a result of discussions with Mrs King of that office, on 16 August 2000 Mr and Mrs Henke sent Forms SA108 showing that Plot 1 had been sold on 15 October 1999 for £171,000, and claiming that full relief was due under Taxation of Chargeable Gains Act 1992 section 222s. 222 of the Taxation of Chargeable Gains Act 1992 ("TCGA 1992"). These forms had been supplied by the Huntingdon Tax Office, together with a copy of HMRC Booklet COP11 "Enquiries into Tax Returns by Local Tax Offices" and Leaflet IR167 "Charter for Inland Revenue Taxpayers".
12. In response to Mr Henke's letter dated 16 August 2000, HMRC's Bootle 1 District wrote to him regarding the disposal of land by him and Mrs Henke in October 1999.
13. Following an exchange of correspondence relating to the status of Forms R40 (considered below), Mr Quayle, a Regional Complaints Examiner based at HMRC's Bootle office wrote to Mr and Mrs Henke on 25 July 2001 to deal with concerns which they had expressed, and said:
Our enquiry into your tax affairs for the year 1999/2000 should have been opened properly and in line with our best practice. Unfortunately, this did not happen and I have tried my very best to compensate you for our mistakes within the terms of our Code of Practice. A legal enquiry does however exist, and authority can be found under Taxes Management Act 1970 schedule 1ASchedule 1A Taxes Management Act 1970. Your suggestion that we write to you and agree your claim to relief under Taxation of Chargeable Gains Act 1992 section 222section 222 [TCGA] 1992 is not possible until the District Valuer has provided us with guidance as to whether the land/property disposed of can be considered as within the "permitted area".
14. On 2 August 2001 Mr Besson of HMRC's Bootle office wrote to Mrs Henke to confirm that the enquiries were into her 1999-2000 claim form as well as Mr Henke's, and to provide her with a copy of the Code of Practice.
15. After a meeting held at HMRC's Huntingdon Tax Office between Mr and Mrs Henke and Mr Warner and Mrs Johns of HMRC, Mr Besson wrote to Mr and Mrs Henke to tell them that the question of the "permitted area" in relation to Plot 1 was being referred to the District Valuer for a decision. On 8 January 2002 Mr Besson wrote referring to a further disposal of land (Plot 2), on which Mr Henke had requested information as to what would be treated as the date of disposal. The letter also referred to the completion of "your Tax Return/Claim".
16. On 9 January 2002 Mr Catley wrote to Mr Henke stating his conclusion that the land disposed of on 18 October 1999 was not required for the reasonable enjoyment of Old Oak House as a residence and therefore did not qualify for exemption. He also stated: "In my opinion the house is capable of reasonable enjoyment without the benefit of the 2 plots which have been sold."
17. On 26 January 2002 Mr and Mrs Henke submitted to HMRC's Bootle office Forms R40 for the year to 5 April 2001 together with completed forms SA108 showing the disposal of Plot 2 for £230,000, divided equally between Mr and Mrs Henke. The forms SA108 showed claims for full relief under Taxation of Chargeable Gains Act 1992 section 222s. 222 TCGA 1992.
18. In his letter dated 18 July 2002, Mr Besson said:
Although the 1999/2000 situation has not yet been resolved I must consider how best to proceed concerning 2000/2001. You have submitted form R40 with pages normally submitted with a Self Assessment return. I have decided to issue a Self Assessment return to you (under Taxes Management Act 1970 section 8section 8 Taxes Management Act 1970) which...
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