A special commissioner upheld discovery assessments raised in respect of the sale of two plots of land which formed part of the freehold land on which the taxpayers’ principal private residence had been built. In the absence of returns by the taxpayers, the commissioner concluded that an inquiry had been properly held and the assessments raised were validly made.

Facts

The taxpayers jointly purchased a freehold plot of land of 2.66 acres in 1982 for £20,000, with legal costs of £289. At the time of purchase outline planning permission had been granted for one house to be built on the plot with a permanent covenant restricting development to only one house. In February 1991, construction work on the foundations of the house commenced and in February 1992 the restriction was lifted making it possible for further planning applications to be made. The house was completed in 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. The taxpayers took up residence in June 1993 and had continued to occupy the house which was substantial, with approximately 4,500 square feet of living accommodation. It also had a large garage block of approximately 1,000 square feet within its curtilage. Between acquiring the plot in 1982 and 1992, the taxpayers lived in two owner-occupied properties which were both sold at a profit. From October 1992 until moving into the new house, they lived in a rented unfurnished property.

In July 1995 detailed planning permission was granted for two dwelling-houses to be built to the front of the new house, within the 2.66 acre plot. Subsequently, each of the plots was sold, but in each case was maintained until the time of sale as part of the garden and grounds of the principal house. In October 1999, plot 1 with an area of 0.54 acres was sold for £171,000. Out of the proceeds, the £60,000 mortgage was redeemed. In March 2001, plot 2 with an area of 0.54 acres was sold for £230,000. The proceeds of sale of each plot were divided equally between the taxpayers.

Having regard to their income, the taxpayers normally completed Forms R40 to give details of their income to the Revenue and Customs Commissioners (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 those forms to HMRC's Bootle office. HMRC dealt with the repayment claims by sending repayment cheques in May 2000. No mention was made of the capital gains but, following advice from a different tax office, the taxpayers submitted Forms SA108 showing that plot 1 had been sold on 15 October 1999 for £171,000, and claiming that full relief was due under TCGA 1992, s. 222. In January 2002 the taxpayers 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 the taxpayers and claiming full relief under TCGA 1992, s. 222. Following an inquiry, in October 2003, the taxpayers received notices of assessment showing taxable gains in respect of each sale. The taxpayers appealed.

Issues

What costs should be allowed against the sale proceeds from each plot in the computation of the chargeable gains; the size and location of the ‘permitted area’ in relation to the principal private residence; and whether any private residence relief in relation to the sales of each plot should 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.

Decision

The special commissioner (John Clark) dismissed the appeals.

Returns

The taxpayers had not made ‘returns’ for 1999–2000 (whatever they thought the Forms R40 and SA108 to be). In the absence of a return, s. 29(1) permitted an assessment to be made if an officer of the Board discovered that chargeable gains which ought to have been assessed to CGT had not been assessed. If that precondition was met, the officer might make an assessment in the amount which ought in his opinion to be charged in order to make good the loss of tax. In this case, although the correspondence did not refer to the assessments as discovery assessments nor to the loss of tax, they were properly made pursuant to s. 29 and were therefore valid.’

However, HMRC had dealt with the whole subject of the 1999–2000 capital gains in a most unsatisfactory manner. If a taxpayer had made capital gains in excess of the amount of income in respect of which he or she would normally make a repayment claim, it was wholly inappropriate to use Form R40. HMRC needed to be vigilant in reviewing the indications on Forms R40 that capital gains had arisen for the year in question. Where the taxpayer had ticked the relevant box, that should result in an immediate request for further information. If the gain was likely to be substantial, the proper course would be to issue a self-assessment return to the taxpayer, rather than attempting to deal with the matter by using Form R40(CG). The latter form was only suitable for minor gains that reduced, but did not eliminate, the repayment claim. HMRC should instruct their officers not to issue or accept Forms SA108 without the full self assessment return. Further, it was unsatisfactory that the assessments were not described in the correspondence as discovery assessments. Taxpayers should be told the reasons for the making of assessments, even if the strict statutory position was that the omission of the description did not invalidate such an assessment.

It followed that the Forms R40 and the accompanying SA108 pages for 2000-01 did not constitute ‘returns’ for that year. The taxpayers did not make returns for 2000-01 until 9 December 2002. Notice of the enquiry was issued on 4 February 2003, which was within the enquiry window applying under TMA 1970, s. 9A(2)(b). There was no difficulty with the fact that there might have been prior discussions about the disposal; the enquiry could only be into a ‘return’, and events before the return had been issued could not be taken into account. The enquiry was properly closed pursuant to TMA 1970, s. 28A. Therefore the amendments to the taxpayers’ returns on the conclusion of the inquiry were validly made.

Allowable costs

An issue arose whether any of the costs of building the principal house were allowable against the sale proceeds of the two plots. The sales of plot 1 and plot 2 were each part disposals within TCGA 1992, s. 21(2). What the taxpayers owned before the disposal of plot 1 was a single plot of 2.66 acres with two buildings on it, the house and the garage within its curtilage. When plot 1 was sold, an interest or right in that part of the land was created by the disposal; it did not have to exist (or ‘subsist’) before the disposal. The balance of the original plot remained undisposed of. The position was similar on the later sale of plot 2, although the amount of the original plot retained by the taxpayers was of course smaller. The conditions for a part disposal were clearly met on each occasion. TCGA 1992, s. 42 governed the attribution and, where appropriate, the apportionment of expenditure in relation to part disposals. Section 42(4) made it clear that an apportionment was not to be made where on the facts the expenditure was wholly attributable to what was disposed of, or wholly attributable to what remained undisposed of. In the present case, unless any of the expenditure on building the house and its garage could be regarded as having been reflected in either or both of plot 1 and plot 2, it could not be taken into account under TCGA 1992, s. 38 as an allowable deduction in computing the gains on the sale of those plots.

On the common sense view, the building costs were wholly attributable to the asset retained. The purchase cost plus the incidental costs was the only expenditure falling within s. 38(1)(a) (acquisition costs). The remaining expenditure fell within s. 38(1)(b) (enhancement costs) or © incidental disposal costs. Where costs fell to be apportioned under s. 42, it was to be done by reference to the formula in s. 42(2), A/(A+B)

A in that formula was the amount or value of the consideration for the disposal, while B was the market value, after each part disposal, of the whole part remaining undisposed of. The market value was to be arrived at by reference to TCGA 1992, s. 272(1), namely ‘the price which those assets might reasonably be expected to fetch on a sale in the open market’. No specific rules applied for the valuation of land. All the expenses that might be deducted from the sale proceeds of plot 1 or plot 2 would be subject to indexation allowance.

Permitted area

The taxpayers’ argument that the permitted area was fixed for all time except where material alterations to the property subsequently took place was rejected. Apart from ignoring the planning permissions which subsequently permitted the sales of plot 1 and plot 2 followed by the building of the two new houses, that argument stretched logic and could not stand in the light of the wording of s. 222(1)(b) (‘land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area’). The test was objective and had to be applied the time of the disposal.

On the evidence, the district valuer had carried out his review of the ‘permitted area’ question in accordance with the relevant statutory provisions. The question of value was outside the commissioners’ jurisdiction, requiring reference to the Lands Tribunal if the parties were unable to reach agreement. The basis on which the sales proceeds of plots 1 and 2 should be apportioned depended on whether the ratio of the non-exempt area to the balance of the area of each plot should be applied to the sales proceeds of that plot, or whether the proportions of those proceeds attributable to the non-exempt area and the exempt area respectively should be arrived at on the basis of the respective values of those areas. The more logical basis appeared to be a test based on area, as the apportionment was one following a decision as to ‘permitted area’.

Period of ownership

Finally an apportionment was required where land was held for a period and subsequently a house was built on it and occupied as the individual's only or main residence. In this case since the taxpayers did not occupy the house until 1993, but had owned the land (as legal owners and beneficial joint tenants of the freehold) since 1982, an apportionment was required under s. 223(2) because they did not meet the ‘throughout the period of ownership’ condition in s. 223(1). The overall scheme of the legislation was to provide a single exemption. It would be odd if the taxpayers could have continued to qualify for private residence relief in respect of their two previous owner occupied properties while benefiting at the same time from the same relief in respect of their unbuilt plot.

(2006) Sp C 550. Decision released 2 May 2006.

Table of the maximum withholding tax rates on interest and royalty payments under the tax treaties between Ireland and the EU Member States.

EU Member State	Interest (%)	Royalities (%)
Austria	0	0
Belgium	0/15<1>	0
Cyprus	0	0
Czech Republic	0	10
Denmark	0	0
Estonia	10	5/10<2>
Finland	0	0
France	0	0
Germany	0	0
Greece	5	5
Hungary	0	0
Italy	10	0
Latvia	10	5/10<2>
Lithuania	10	5/10<2>
Luxembourg	0	0
Netherlands	0	0
Poland	10	10
Portugal	0/15<3>	10
Solvek Republic	0	10
Solvents	5	5
Spain	0	5/8/10<4>
Sweden	0	0
United Kingdom	0	0
Source: EU Commission
1. The lower rate appliesto interest payments between banks on current accounts and nominal advances and to interest on bankdeposits not represented by bearer bonds.
2. The lower rate applies to royalties for industrial, commercial or scientific equipment.
3. The lower rate applies if the payer is the government or a local authority.
4. The 5% rate applies to royalties for copyrights of literary dramatic, musical or artistic work; the 8% rate applies to copyrightroyalties on films, etc. and to royalties for industrial, commercial or scientific equipment.