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HMRC internal manual

Capital Gains Manual

Private residence relief: letting: application to letting trades

The owner of a property occupied wholly or partly as an only or main residence which is also used for a trade involving letting, for example, a guest-house, hotel or nursing home, may live in different parts of it at different times of year. For example, the Owen family in Owen v Elliott (63TC319), occupied a self contained annex to their guest-house in the summer months, but in winter, when there were few guests, they occupied the main building. It was found as a fact that the whole property and not just the annex was the Owens’ dwelling house for TCGA92/S222 purposes. This illustrates the importance of establishing the entity of the dwelling house.

The first step is to determine whether the property which has been sold is a dwelling house. In those few cases where it is not, relief under TCGA92/S222 is limited to the gain arising on those rooms which have at some time been the owner’s only or main residence, see CG64320. If, exceptionally, those rooms have been let as residential accommodation, relief under TCGA92/S223(4) will be available but in respect of those rooms only. Relief under TCGA92/S223 (4) is not available in respect of the remainder of the building, see CG64719.

If the individual’s residence is in a dwelling house the next step is to identify the entity which makes up the dwelling house of that individual, see CG64230+. If that dwelling house is a smaller self-contained unit within a building, relief under TCGA92/S222 and TCGA92/S223 (4) is only available against the gain on that unit, see CG64305-CG64312. So letting of the rest of the building would not give rise to relief under TCGA92/S223 (4).

If the individual’s residence is a dwelling house, part of which has been let as residential accommodation, then relief is available under TCGA92/S223(4) in respect of the whole dwelling house.

Support for this approach may be obtained from some remarks of Millett, J. in his High Court decision in Owen v Elliott (63TC319) on page 325

‘During the summer season the taxpayer and his family occupied the annex and used the main building for the occupation of the hotel guests. During the rest of the year, however, they occupied the whole of the building in common with their guests, who were rarely more than one or two in number. It is that feature of the case which raises the present problem, for had the taxpayer and his family remained in occupation only of the annex that would have been treated as the dwelling house which formed the taxpayers only or main residence for the purposes of the relevant statutory exemption and the rest of the building would not have been treated as a dwelling house at all and would have been outside the exemption.’

These remarks did not form part of his reasons for deciding the case and thus do not have binding authority. Although the Court of Appeal overturned the High Court decision they did not comment adversely on the above remarks. So they are a persuasive indicator of judicial thinking.