[2009] UKFTT 291 (TC)

TC00235

             Appeal number: TC/2009/11682

CGT – PRIVATE RESIDENCE RELIEF -  TAPER RELIEF FOR BUSINESS ASSETS- Appellants disposing of a hotel - capital asset  –  part business, part non-business use of asset - private residence relief available in relation to non- business gains  –  yes  – were all of remaining gains eligible for business asset taper relief  –  should remaining gains be re-apportioned into business and non- business gains for taper relief purposes  –  yes – but just and reasonable apportionment required – all remaining gains eligible for business asset taper relief -  Appeal allowed.

FIRST-TIER TRIBUNAL 

TAX

	I S JEFFERIES AND L A JEFFERIES	Appellants

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE and CUSTOMS	Respondents

DECISION NOTICE

Rule 35(2) The Tribunal Procedure (First Tier Tribunal)(Tax Chamber)Rules 2009

TRIBUNAL: 		Rachel Short (Judge)
David Earle (Member)				
						
Sitting in public in Truro on 10 September 2009

© CROWN COPYRIGHT 2009

DECISION

Having heard the Appellants in person and Mrs Jane Hodge for the Respondents, the Tribunal decided that the appeal should be allowed.
1.	Mr and Mrs Jefferies (“the Taxpayers”) are appealing against amended tax assessments and closure notices issued by the Respondents (“HMRC”) under s 31 TMA 1970.
2.	The basis of the appeal concerns the interaction of the private residence relief from capital gains tax (“PRR”) at s 222 Taxation of Chargeable Gains Act 1992 (“TCGA”) and the taper relief legislation at s 2A TCGA.
Agreed Facts:
3.	The Taxpayers sold a hotel which they owned in equal shares in partnership in September 2006 for £855,000. That was the disposal of a capital asset on which capital gains tax would be payable subject to any available reliefs.
4.	The hotel had been used partly as a private residence and partly for the Taxpayers’ hotel trade.  It was agreed between the parties that 35% of the hotel should be treated as allocable exclusively to the Taxpayers’ hotel business and the remaining 65% should be allocable to the Taxpayers’ use as a private residence.
5.	The Taxpayers had incurred £278,055 of acquisition and other costs which were deducted from the sale proceeds, leaving a total capital gain of £576,945 split equally between the Taxpayers.
6.	PRR was available to the Taxpayers in respect of the gains relating to the element of the hotel (65%) which was allocated to their private residence in accordance with s 224 (1) TCGA. This amounted to £375,014, or £187,507 each.
7.	After the application of PRR £201,931 of chargeable gains remained, or £100,965.50 each.
8.	In the remainder of this judgment the chargeable gains figures referred to are the aggregate gains arising to both Taxpayers rather than their individual share.
9.	The parties agreed that PRR should be applied before the application of any other capital gains tax reliefs and in particular before the application of taper relief.
The Arguments:
10.	The only point at issue between the parties is how the remaining £201,931 of chargeable gains should be taxed and in particular how the taper relief rules at s 2A and Schedule A1 TCGA should be applied to those gains. The two sides expressed the point at issue slightly differently.
11.	HMRC expressed the issue as whether the Taxpayers’ gains after PRR should be apportioned between business and non business gains for taper relief purposes.
12.	In contrast the Taxpayers formulated the issue as whether the unrelieved business portion of the gain should attract business asset taper relief fully, or should the unrelieved business portion of the gain be apportioned again between business and non business use.
13.	 The Taxpayers’ position is that the unrelieved gains arising on the sale of the hotel should not be apportioned into business and non business gains before the application of taper relief since an apportionment between business and non business use has already been made for the purposes of PRR.
14.	The Taxpayers argue that s 224(1) TCGA, in allocating gains arising from an asset used partly for a business and partly for a non business purpose attributes those gains to a specific, physical part of the property and that this is supported by HMRC’s guidance in their CGT Manual (CG64663). 
15.	To apply taper relief correctly it is necessary to identify the asset type (business or non business) associated with the chargeable gain. The chargeable gains on the asset in question here are attributable to the business use of the property and therefore the whole of the gain qualifies for business asset taper relief.
16.	Finally, the Taxpayers say that HMRC’s approach results in the payment of more rather than less tax as the result of the application of relieving provisions.
17.	The result of the Taxpayers’ argument is that a total of £50,482 of chargeable gains arise on the sale of the hotel, leaving £32,882 of gains within the charge to tax having taken account of the annual exempt amounts.
18.	HMRC’s position is that the £201,931 of non PRR gains should be apportioned between business and non business gains for taper relief purposes.
19.	HMRC’s argument rests on four basic propositions :(i) the hotel was acquired and disposed of as a single asset; (ii) the chargeable gains arising are the gains accruing on the sale of the hotel minus PRR; (iii) the chargeable gains arise from the disposal of the whole asset and not just the part used for the Taxpayers’ business; (iv) these chargeable gains are subject to taper relief and must be apportioned into a business and a non business gain in order to calculate taper relief.
20.	The result of HMRC’s argument, and applying the same business allocation for taper relief purposes as was applied for PRR (35%), is that a total of £129,232 of chargeable gains arise on the sale of the hotel, leaving £111,632 of gains within the charge to tax having taken account of the annual exempt amounts. 
The Decision:
21.	The Tribunal were grateful for the clear and detailed arguments put forward by both parties. The only question for the Tribunal to consider is the application of the taper relief legislation at Schedule A1 TCGA, in circumstances when relief from capital gains tax has already been partially given under s 222 TCGA in respect of a particular asset.
22.	It was accepted by both parties that there is no published HMRC guidance on the interaction of PRR and taper relief in these circumstances, 
23.	It was accepted by both parties that PRR should be applied before the taper relief rules. 
24.	Therefore, the starting point is s 222 which provides relief from capital gains tax for gains arising on the disposal of a dwelling house if that has been the individual’s main residence throughout the period of ownership. To the extent that part of a dwelling house has been used exclusively for the purposes of a trade or business, the relieving provisions at s 222 are disapplied by s 224.  Section 224 is in point here and it has been agreed that the “business” apportionment for these purposes is 35% of the gains.
25.	It is worth considering exactly how s 222 operates to remove a gain on the disposal of a dwelling house from charge; any gain to which s 222 applies is not to be treated as a “chargeable gain” for the purposes of the TCGA and so is outside the basic charging provisions of s 2(1) TCGA, which brings only chargeable gains into tax.
26.	Section 222 operates, as do the relieving provisions of the TCGA generally, by removing the gain, or a part of the gain, from charge, not by removing the asset, or any part of the asset from charge. The Taxpayers argued that the reference to “parts” of the asset used exclusively for business purposes in s 224 TCGA means that s 222 operates by removing that part of the asset from charge. We do not think that this is the correct interpretation of how s 222 applies. The section is concerned with apportioning and relieving the gain arising from the asset, not in apportioning the asset itself.
27.	It might be argued that since, for the purpose of the TCGA, gains can only arise from assets, the result of taking gains out of the charge to tax must, by implication, take the asset (or part of the asset) from which the gain derives out of the charge to tax, but that is not what the legislation actually says.
28.	The result of applying s 222 in this case on the basis of the agreed business apportionment, is that only £201,931 of gains remain within the charge to tax as “chargeable gains”.  It is axiomatic, at this point, that those chargeable gains are gains relating to the part of the asset which is treated for PRR purposes as being used exclusively for business purposes.
29.	It is then necessary to consider how the taper relief rules at s 2A TCGA apply to these remaining chargeable gains. In accordance with that section chargeable gains are eligible for taper relief to the extent that they are gains on the disposal either of a business or a non business asset (subject to the relevant qualifying holding period).
30.	The legislation provides specific rules in respect of assets which are used partly for business and partly for non business purposes, (paragraph 9 of Schedule A1 TCGA).
31.	Given that the gains in question have already been apportioned under s 222 as relating to the part of the hotel which was used for business purposes, in the Taxpayers’ view this must lead inevitably to the conclusion that the whole of the remaining chargeable gain is eligible for taper relief as the gain on the disposal of a business asset.
32.	This seems an eminently logical conclusion and HMRC acknowledged that any other conclusion would not appear intuitive. However, the legislation is not quite that straightforward.
33.	First, the definition of what is a business asset for taper relief purposes and what is a business gain for PRR purposes are not exactly the same. It is in theory possible to have a non PRR gain for the purposes of s 224 which does not qualify for business asset taper relief and vice-versa. In this instance it has been agreed between the parties that the business and non business apportionments should be treated as the same for both PRR and taper relief purposes.
34.	Secondly, and this is the essence of the issue here, the taper relief legislation at s 2A (3) TCGA asks not whether the gain for which relief is sought is a gain arising from an asset (or part of an asset) which was used exclusively for business purposes, but whether it is the gain on the disposal of a business asset.
35.	If it is accepted, as we consider it must be, that s 222 has not removed the capital asset, or any part of it from the tax net, but only the gains or part of the gains relating to it, and on the basis that the apportionment under s 222 is an apportionment of gains and not of the underlying capital asset, the taper relief rules have to be applied to the whole of the relevant asset, to the whole of the hotel.
36.	The legislation does not provide room to argue that since the chargeable gains in point arise only from a proportionate part of the asset, it is only that proportionate part of the asset which can be considered for taper relief purposes.
37.	Having identified the underlying asset, paragraphs (3) and (5) of Schedule A1 TCGA define what is a business asset for these purposes and paragraph (9) prescribes how the legislation is to be applied when, as is the case here, a business asset is used for different purposes during the relevant holding period (a “mixed use period”); it is necessary to establish the proportion of the business asset which, by reason of non-qualifying use, is to be treated as a non business asset for the purposes of the taper relief calculation.
38.	Applying this methodology to the non PRR chargeable gains arising on the hotel, and using the 35% as the relevant business proportion, HMRC have argued that only 35% of the chargeable gains should be treated as the gains on the disposal of a business asset for taper relief purposes.
39.	HMRC have acknowledged that this seems an anomalous result but submitted that nevertheless this was what the legislation required.
40.	The interaction of the taper relief legislation and s 222 as applied by HMRC does have the result of producing gains from this asset which are outside the scope of both PRR and business asset taper relief. It is interesting to consider what the source of these gains can be; unless they are gains arising from a completely different asset, if they are not gains arising from the business proportion of the hotel, they can only be gains arising from the non business proportion of the hotel. These would be expected to fall outside the scope of capital gains tax as a result of the application of s 222.  That the legislation has not led to this result does seem to the Tribunal to be at best anomalous.
41.	There is a specific requirement in the taper relief legislation that any apportionments should be done on a just and reasonable basis (Paragraph 21 of Schedule A1).  We cannot agree with HMRC that applying the apportionment in paragraph 9 such that only 35% of the chargeable gains should be treated as eligible for business asset taper relief is just and reasonable in these circumstances. 
42.	In the Tribunal’s view the just and reasonable apportionment which should be made under paragraph 9, Schedule A1 is to apportion the chargeable gains on the basis that there is no proportion of the use of the asset which is a non qualifying use.  
43.	Taking this approach, the whole of each Taxpayer’s chargeable gain in respect of the asset remaining after the application of PRR should be treated as eligible for business asset taper relief.
44.	On this basis we are allowing the Taxpayers’ appeal.
45.	The Respondents have a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules.   The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

TRIBUNAL JUDGE

RELEASE DATE: 29 October 2009