DRAFT SCHEDULE 2: “CHARGEABLE GAINS:
PRIVATE RESIDENCE RELIEF”
Comments of the Society of Trust and Estate Practitioners
Denial of private residence relief after hold-over relief ............................................ 2
The mischief ................................................................................................................ 2
Countering the mischief .............................................................................................. 3
Policy arguments........................................................................................................... 4
Further reasons to review the policy decision behind the draft Schedule .............. 4
Restriction on private residence relief: Conclusion .................................................. 5
Our proposals ................................................................................................................ 6
Transitional rules .......................................................................................................... 6
Revocation of section 165 or 260 claim ....................................................................... 7
Replacing “Inspector” with “Officer of the Board” .................................................. 7
Disposal of private residence relief by personal representatives ............................. 8
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1. This Note contains the comments of the STEP Technical Committee on the
Draft Schedule 2 (Chargeable Gains: Private Residence Relief) published with
the Pre-Budget Report, 10th December 2003. It is based on a first draft
prepared by James Kessler, Q.C.
2. We greatly welcome the opportunity to comment on draft clauses well before
the publication of the Finance Bill. This allows a much more considered
consultation process.
Denial of private residence relief after hold-over relief
3. This is not the first clause of the Schedule but we deal with it first as it is by far
the most important.
The mischief
4. The new legislation is intended to stop the scheme explained in Tolley‟s Tax
Planning in this way:
“The „classic‟ planning might proceed as follows. The parents settle into a
discretionary trust for the benefit of their children and others a second home
carrying a large gain. The gain is held over by election under TCGA 1992, s
260. After a few months, the trustees permit the son of the settlors to occupy
the property as his main residence, which he does for at least a year. The
house is then sold with, it is claimed, the benefit of exemption for the whole of
the gain under TCGA 1992, s 225. If the planning is aggressive, the settlor
might even be added as a beneficiary to the settlement and some or all of the
proceeds of sale advanced to him.”1
On a disposal by the trustees, the total gain which represents
(a) the gain accruing while the Settlors owned the asset (“the held-over
gain”) and
(b) the gain accruing while the trust owned (and the beneficiary (“B”)
occupied) the asset (“the period of residence gain”)
would under current law qualify for private residence relief.
5. One can distinguish broadly three circumstances in which this may be done:
(1) Where B‟s occupation of the property is short-term or ephemeral. In
such a case no private residence relief applies under current law as the
1
Tax Planning, 2003-4 para 50.47.
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property does not become B‟s “residence”. (Note that according to the
textbook cited above the period should be “at least a year”.)
(2) Where B‟s occupation is:
(a) sufficient to constitute the property B‟s “residence” but
(b) is nevertheless relatively brief, and, perhaps, arranged
specifically in order to qualify for the exemption.
(3) Where B‟s occupation is a very long-term matter, for instance, more
than six years.
6. In circumstance (1) there is, as noted, no tax relief under the current system and
no amendment is needed. Circumstance (2) should be classified as a tax
avoidance scheme and we would not quarrel with a decision to restrict relief in
these circumstances, though we consider below how this is best achieved.
7. Circumstance (3) is not on any view a tax avoidance scheme. It would
normally only arise in circumstances where
(1) a parent wishes to purchase a property for a child‟s occupation, and
(2) because of the child‟s financial insecurity or immaturity, the parent does
not wish to give the funds to the child absolutely to purchase the
property. In these circumstances the parent who has not taken tax
advice would purchase a property in his own name and let the child
occupy it.2
(3) Later the parent might wish the property to be transferred to a trust for
the child in a manner which qualifies for hold-over relief and, in the
long term, private residence relief.
Countering the mischief
8. Section 226Awithholds all private residence relief on subsequent disposals of
the property. It applies regardless of when the property is disposed of. This is
an overreaction.
9. A fair anti-avoidance rule would deny relief for the held over gain only. This is
the solution taken in section 74 TCGA 1992. This section applies in a closely
comparable situation, where hold-over relief is claimed on a disposal to an
interest in possession trust, and the CGT “tax-free uplift” would apply on the
2
A well advised parent would avoid this trap by settling the property from the outset, and would not be
affected by the new rules in any way.
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death of a life tenant. In such a case the “tax-free uplift” still applies but relief
is not applicable to the extent of the held over gain. Instead the hold-over gain
is deemed to accrue on the death of the life tenant. This is an entirely
appropriate response.
10. It might perhaps be argued that there is no need for fairness in an anti-
avoidance provision.3 We would emphatically reject this approach. In any
case the proposals here would apply in circumstances where there is no tax
avoidance: see paragraph 7 above.
Policy arguments
11. Leaving fairness to one side, for a moment, it should be remembered that there
is a good policy reason for private residence relief. There is a powerful public
interest in the availability of the relief, because it allows a homeowner to move
(without a heavy CGT liability):
(1) in order to take a job; and
(2) as his or her needs, accommodation and financial circumstances require.
12. The new provisions restrict this, and we think everyone will agree that this is
greatly to be regretted. While CGT necessarily imposes a “lock in” effect, such
an effect in relation to one‟s main private residence is much more serious than
in relation to any other asset. So far as the provisions go further than they need
to meet the potential for avoidance, we suggest the result is not only unfair but
also against this important public interest.
13. For these reasons we suggest the clawback should only arise if the disposal
qualifying for private residence relief is within a certain time of the disposal on
which hold-over relief is claimed. A clawback period of six years seems
appropriate. This will restrict the private residence relief to bona fide cases and
stop tax avoidance.
Further reasons to review the policy decision behind the draft Schedule
14. Under the draft clauses, a choice must be made between hold-over relief and
private residence relief. In practice the choice will often be a gamble for the
taxpayer, as he is unlikely to be in a position to judge which of the two reliefs
will be more valuable to him. We do not think a tax system which imposes
such imponderable decisions on a taxpayer is a satisfactory one.
3
“It scarcely lies in the mouth of the taxpayer who plays with fire to complain of burnt fingers;” Lord
Howard de Walden v. IRC 25 TC 121. But this approach was rejected in later cases, such as Vestey v.
IRC 54 TC 503.
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15. Notes on Clauses provide:
“67. John makes a gift of an asset to Anne in August 2001. The gift is a
chargeable disposal for IHT purposes. The asset cost him £10,000 in
June 1998, and its market value in August 2001 is £25,000. Anne sells
the asset for £35,000 (net of expenses) in July 2003.
68. If John does not claim gifts relief, a chargeable gain (before any taper
relief) of £15,000 (market value £25,000 less cost £10,000) will arise
to him in the tax year 2001-02. And when Anne sells the asset, a
chargeable gain (before any taper relief) of £10,000 (net sale proceeds
£35,000 less market value at acquisition £25,000) will arise to her for
the tax year 2003-04.
69. If John and Anne jointly make a claim for gifts relief, the gain of
£15,000 is held over and no chargeable gain arises to John in the tax
year 2001-02. But when Anne sells the asset, her allowable
expenditure is reduced to £10,000, because the market value of the
asset she is deemed to have paid when she acquired it from John
(£25,000) is reduced by he amount of the held-over gain (£15,000). As
a result her chargeable gain (before any taper relief) for the tax year
2003-04 becomes £25,000 (net sale proceeds £35,000 less allowable
expenditure £10,000).
70. So, in effect, John‟s held-over gain of £15,000 becomes chargeable on
Anne when she disposes of the asset.”
16. This example is, with respect, altogether misconceived as we are sure the
Revenue will on re-reading this passage agree.4 The reason we point this out is
not to score a cheap point. It is to stress that the scheme or arrangement which
the new legislation is intended to impede is by no means as easy or
straightforward to do successfully as this erroneous example might suggest.
The stringency of anti-avoidance legislation should be in proportion to the
mischief. That the proposals are based on this erroneous understanding of the
background law should, we suggest, trigger a fundamental re-think of the
proposed anti-avoidance provisions.
Restriction on private residence relief: Conclusion
17. The paragraphs as they stand are unfair, inconsistent with important public
policy considerations and based on a misunderstanding of the law. They need
to be revised to target the tax avoidance more closely.
4
The gift from John to Anne is not a “chargeable disposal”. This concept does not exist in IHT law. It
is a Potentially Exempt Transfer.
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Our proposals
18. The proposal which we favour would be:
(1) to restrict private residence relief only on disposals within six years of a
disposal on which hold-over relief is claimed; and
(2) to disapply private residence relief only to the extent that a gain has
been held over. The restriction should not apply to the “period of
residence” gain.
19. There are of course other possibilities:
(1) One possibility, slightly harsher but also slightly simpler, would be to
disapply all private residence relief, but only on disposals within six
years of a disposal on which hold-over relief is claimed.
(2) Another possibility would be to “phase in” private residence relief by
time apportionment over six5 years. That is, reduce the relief by the
fraction A ÷ 6 where A is the time (in years) between a disposal on
which hold-over relief is claimed and a subsequent disposal. Thus a
disposal after two years qualifies for one-third of the private residence
relief, a disposal after four years two-thirds, and a disposal after six
years qualifies for the full relief. This would mitigate the “lock in”
effect of a simple six year cut-off. It is similar to taper relief.
Both of these are in our view slightly less satisfactory solutions than our
preferred solution. However, either of them would be much more satisfactory
than the current draft clauses.
Transitional rules
20. If our proposal that relief is applicable except for the held-over gain is
accepted, the transitional rule would be straightforward: the held-over gain
would be time apportioned between:
(1) the period between acquisition and 10th December 2003; and
(2) the period from 10th December 2003 and the date of the disposal
qualifying for private residence relief.
5
Alternatively, ten years (consistent with taper relief for non-business assets).
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Revocation of section 165 or 260 claim
21. Section 226A(6) provides:
“(6) If a claim for relief under section 260 in respect of an earlier disposal is
revoked, this section shall apply as if the claim had never been made.”
Likewise section 169C(10) provides:
“(10) If a claim for relief under section 165 or 260 in respect of the relevant
disposal is revoked, this section shall apply as if the claim had never
been made.”
However there is no provision which states that a section 165 or 260 claim is
revocable. We suggest such a provision needs to be expressly made.
Replacing “Inspector” with “Officer of the Board”
22. The new legislation replaces “Inspector” with “Officer of the Board” in several
places6 e.g. section 222(5) now reads:
“(5) So far as it is necessary for the purposes of this section to determine
which of 2 or more residences is an individual‟s main residence for any
period—
(a) the individual may conclude that question by notice to an
officer of the Board given within 2 years from the beginning of
that period but subject to a right to vary that notice by a further
notice to an officer of the Board as respects any period
beginning not earlier than 2 years before the giving of the
further notice,”
23. The Notes on Clauses do not give the reason for the change, but we assume the
reason is the same as that given in the Explanatory Notes to ITEPA 2003. 7 If
6
The full list is: ss.77, 78, 79, 221, 222 and 225 TCGA 1992.
7
Every reference in the old legislation to an inspector was replaced in ITEPA by a reference to an
officer of the board. Change 158 explains the background:
“ITEPA, s Change158
This converts references in the rewritten legislation to an inspector or to the Board of Inland
Revenue into references to any officer of the Board.
(A) References to an inspector
The legislation rewritten in the Act contains a substantial number of references to an "inspector"
(which means an inspector of taxes: see section 832(1) of ICTA). The Act replaces such references
with references to "the Inland Revenue". This expression is defined by section 720(1) of the Act to
mean any officer of the Board of Inland Revenue. For the purposes of the Act "the Board of Inland
Revenue" means the Commissioners of Inland Revenue appointed under section 1 of the Inland
Revenue Regulation Act 1890: see section 720(2) of the Act.
As a result, the provisions affected will expressly authorise or require things to be done by or in
relation to an officer of the Board instead of by or in relation to an inspector. This is consistent with
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that is correct, we suggest it would be simpler and more satisfactory to replace
every instance of “inspector” in the entire CGT legislation in this way, rather
than dealing with the matter in a piecemeal way. The word “Inspector” is used
69 times in the TCGA 1992; it seems unnecessarily complicated to amend a
dozen of the references and leave the rest for later amendment or for the tax
law re-write (if indeed that ever reaches the CGT legislation).
Disposal of private residence relief by personal representatives
24. We welcome the enactment of Extra-Statutory Concession D5.
26th February, 2004.
the internal reorganisation of the Inland Revenue which took place in the mid-1990s and resulted in
the merger of the previously separate networks of collection and tax offices and less rigid
specialisation in relation to particular functions.
This represents only a minor change in the law because a similar result could in many cases be
achieved by a different means under section 1(2B) of TMA 1970, which was inserted by FA 1990.
Under that provision a person who is not an inspector may for particular purposes exercise functions
conferred on inspectors if, in accordance with the Board's administrative practices, he or she has
been authorised to act as an inspector for those purposes.”
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