Ritchie; Ritchie
| Jurisdiction | UK Non-devolved |
| Judgment Date | 24 May 2017 |
| Neutral Citation | [2017] UKFTT 449 (TC) |
| Date | 24 May 2017 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Richard Thomas, Celine Corrigan
Keith Gordon, instructed by Rodgers Weir & Co, Chartered Accountants, appeared for the appellant
Simon Foxwell, advocate HMRC Solicitor's Office, appeared for the respondents
Capital gains tax – Private residence relief under Taxation of Chargeable Gains Act 1992 (“TCGA 1992”), s. 222 to 224 – Whether and to what extent grounds exceeding 0.5 hectares required for enjoyment of house – Location of excess area – Whether ownership period included period of over seven years before occupation – Whether HMRC entitled to raise assessments on basis of discovery of tax loss – Whether conduct careless – Whether HMRC evidence should be excluded – Appeals allowed in part.
The FTT decided that HMRC was entitled to raise assessments, but allowed in part the appeals on the amount of private residence relief available, reducing the quantum of the assessments.
Mr & Mrs Ritchie (Ritchies) were appealing against discovery assessments made against each of them in respect of the sale of their house, other buildings and land in Co. Londonderry in January 2007. Assessments had been raised by HMRC under TMA 1970, s. 29 on each of the Ritchies for gains arising in 2006–07 of £100,000 on 12 March 2013. Additional assessments were raised by HMRC on each of the Ritchies for gains arising in 2006–07 of £342,640 on 27 March 2013.
The Ritchies purchased land that had formed part of a dismantled railway line and station for £11,000 in July 1987. The only buildings that stood on the land was a large shed and a smaller building referred to as the potting shed. The total area of the land was between 0.65 and 0.7 hectares.
The Ritchies rented a house on neighbouring land at 22 Station Road and the large shed on the purchased land was used to store their children's toys, the car, various tools, firewood, vegetables and ploughs used by Mr Ritchie in competitions.
After applying for planning permission in 1991 to build a three-storey house on their land, building started in 1992 and the total cost of building and creating gardens and a driveway was approximately £180,000.
In the course of applying for planning permission, it came to light that an area of land at the northeast of the site was owned by the Department of Transport rather than the Ritchies. The land was acquired in 2002 for no cost (other than legal costs of £1,050) when the Department of Transport formally abandoned it.
The Ritchies first occupied the house in January 1995 (which became known as 28 Station Road).
The Ritchies were approached by developers in June 2006 who wanted to build an estate behind their property and needed their land for access. The developers offered them £2m for the whole of the land. The Ritchies accepted the offer. When the transaction completed on 19 January 2007, the money was paid into the Ritchies' business bank account as this was the only bank account they had.
Mr Ritchie had sought the advice of his accountants, Weir & Co, following the sale of his house. Weir & Co had referred Mr Ritchie to a tax specialist, Mr Russell. Mr Russell gave a verbal opinion to Mr Ritchie on the permitted area rules for private residence relief but did not address the period of ownership before the house was occupied. Mr Ritchie's interpretation of Mr Russell's opinion was that there was no tax to pay which Mr Ritchie conveyed to Weir & Co. Weir & Co made no entries on the CGT pages of the Ritchies' tax returns, no white space disclosure and did not refer to Helpsheet IR 283 when preparing the returns.
In May 2010, HMRC started an enquiry into the 2006–07 partnership return of the Ritchies concerning the source of the introduction of capital into the business of just over £2m.
In July 2010, the Ritchies' accountants, Weir & Co, informed HMRC that the £2m was from the sale of the Ritchies' house.
Following correspondence between the parties and HMRC asking the district valuer's informal view on whether all of the land was in the permitted area, HMRC issued discovery letters to the Ritchies on 22 January 2013 in relation to their personal income tax returns for 2006–07.
The substantive issue concerned whether the Ritchies had made a chargeable gain on the sale of their house and the availability of private residence relief. In particular, the case focussed on the permitted area (as only land within the permitted area qualifies for relief) and whether the large shed located 85 metres from the main house formed part of the dwelling house and also the availability of relief for the seven-and-a-half-year period from when the land was acquired in July 1987 and the occupation of the house in January 1995.
The procedural issue concerned whether HMRC were entitled to issue assessments on the Ritchies to recover the CGT said to be due and the application of the facts to TMA 1970, s. 29 and 36 relating to discovery assessments and time limits.
The parties had sought to reach an agreement using HMRC's Alternative Dispute Resolution (ADR) procedures. There had been a previous hearing (see Ritchie; Ritchie TAX[2016] TC 05258) in which the appellants had sought to bar HMRC from taking part in the proceedings (which would have resulted in the appeals succeeding) or to require HMRC to reissue their statement of case to exclude material provided on a “without prejudice” basis during the ADR process. The appellants also asked for the permitted area point to be deferred until after the issue of the extent of the dwelling house had been determined. The judge had considered that it would be more efficient to deal with the permitted area point as part of the main hearing and that while he did not bar HMRC from participation, HMRC were required to exclude the prejudicial material. However, Judge Thomas did put on record that in the course of drafting his decision, he inadvertently read the prejudicial material.
The appellants argued that the large shed was part of the dwelling house, whereas HMRC contended that it was not. Various cases were cited by the parties including Methuen-Campbell v Walters ELR[1979] QB 525, Batey (HMIT) v Wakefield TAX(1981) 55 TC 550, Green v IR Commrs TAX[1982] BTC 378, Markey (HMIT) v Sanders TAX[1987] BTC 176, Williams (HMIT) v Merrylees TAX[1987] BTC 393, Lewis (HMIT) v Lady Rook TAX[1992] BTC 102. All of these cases differed from the current case in that they involved the sale of a building that was in separate occupation as sleeping and eating accommodation.
The FTT also considered Secretary of State for the Environment, Transport & the Regions v Skerritts of Nottingham Ltd ELR[2000] EWCA Civ 60; [2001] QB 59, a planning case that concerned a stable block some distance from a Grade II listed building, even though the case was not cited by the parties.
The FTT agreed with the appellants that the large shed was part of the dwelling house.
The total area of the land was unclear and had been stated in various documents as being between 0.65 and 0.7 hectares. The FTT opted to go with the figure of 0.699 hectares as that figure was the one used most consistently.
The appellants argued that the land outside the permitted area was just the 0.05 hectares at the north-east of the site acquired in 2002 from the Department of Transport. HMRC stated that based upon the report prepared by the district valuer, the permitted area was not more than 0.5 hectares.
The tribunal concluded that it was not bound to choose between the parties' arguments for a specific area following Tower MCashback LLP 1 v R & C Commrs TAX[2008] BTC 805. As the tribunal had concluded that the large shed formed part of the dwelling house, it was mindful that it could not form “islands” when deciding upon the permitted area. The tribunal decided that the areas to the rear and sides of the large shed estimated to be around 0.1 hectares were not within the permitted area.
On the basis of their argument that the land at the north-east of the site was outside the permitted area, the appellants had contended that the land did not have the same quality and value as the rest of the land and therefore its value was nil.
In giving evidence to the tribunal, the district valuer had expressed the opinion that all of the land was of equal value to the developer as all the developer wanted was access to the land beyond and to clear the site for redevelopment.
The tribunal preferred the district valuer's view and determined that the CGT calculation should be made on the basis that one-seventh of the £2m proceeds less allowable costs should be treated as the consideration in computing the gain.
The appellants argued that if the large shed formed part of the dwelling house, then this should be the case throughout the period as it formed part of one combination for one period and part of another for another period. HMRC argued that Henke v R & C Commrs SCD(2006) Sp C 550 requires apportionment as the asset was changed substantially by the construction of the house and that the use of the large shed while the Ritchies were occupying 22 Station Road as tenants was irrelevant.
The tribunal said that it did not accept that the large shed was the residence in the period from 1987 to 1995. However, even if it was, it was not the only residence (as the property rented at 22 Station Road was also their residence) and the Ritchies had not given notice under TCGA 1992, s. 222(5) to notify the shed as their main residence. Also, if the Ritchies had owned 22 Station Road rather than renting it, the same anomalies would arise as in Henke as they would have two properties potentially qualifying for relief for the period from 1987 to 1995.
The tribunal was, however, uneasy about applying time apportionment as that would give rise to a taxable gain of around £630,000 arising...
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