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HMRC internal manual

Pensions Tax Manual

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HM Revenue & Customs
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Investments: taxable property: residential property

Glossary PTM000001
   

Residential property - Introduction
Residential Property
Parts of buildings
Time share and hotels
Halls of residence for students
Property converted or adapted as residential property
Permitted ‘job related’ residential property
Ground rents

Residential property - Introduction

If an investment-regulated pension scheme directly or indirectly acquires taxable property (residential property or tangible moveable property) this will create an unauthorised payments charge on the member whose arrangement acquires the asset. In addition the scheme administrator will be liable to a scheme sanction charge (See PTM121000) both on income from the taxable assets and capital gains on their disposal.

Taxable property consists of residential property and most tangible moveable assets. Guidance on tangible moveable property can be found on PTM125100.

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Residential Property

Residential property can be in the UK or elsewhere and is:

  • a building or structure that is used or suitable for use as a dwelling
  • any related land that is wholly or partly the garden for the building or structure,
  • any related land that is wholly or partly grounds for the residential property and which is used or intended for use for a purpose connected with the enjoyment of the building,
  • any building or structure on any such related land,
  • in limited situations a hotel, which includes an inn, or similar accommodation, will be counted as taxable property though this will only be where it provides accommodation rights such as timeshare. (see below)
  • a beach hut
  • any building specified in Regulations as residential property.

Certain buildings that would otherwise be within the definition of residential property are not to be treated as residential. A building used for any of the following purposes is not residential property:

  • a home or other institution providing residential accommodation for children. This means a dedicated children’s home not simply any home that children can live in, for example, a family’s house,
  • a hall of residence for students. This does not include normal houses or flats let to, for example, university students. See below for more information on halls of residence for students,
  • a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disability, past or present dependence on alcohol or drugs or past or present mental disorder,
  • a hospital or hospice,
  • a prison or similar establishment,
  • any building specified in Regulations as not to be treated as residential property.

If a building is not currently in use then you need to look back at the last time it was used. If it was last used for one of the non-residential purposes set out above then it is not treated as residential property. If the building has never been used and is more suitable for one of the uses specified above than for any other purpose it is not treated as residential property regardless of their suitability for use as a dwelling.

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Parts of buildings

Building or structure includes part of a building or structure.

If a building includes a large number of separate flats then these are all treated as separate buildings.

If a building includes a shop with a wholly separate flat above it is treated as two separate buildings. The flat is a residential property and the shop is a commercial one. A flat is wholly separate if it has a separate entrance and has no inter-connection with other parts (for this purpose a communal hallway is not an inter-connection).

If a building comprises part which is used for commercial purposes, such as a shop, with an inter-connected residential area, such as a flat, this is one building and the whole will be treated as residential as it is suitable for use as a dwelling. Different parts of a building are inter-connected if they share a common entrance and where you can move from one part to another without moving through common areas.

When it is necessary to determine such issues as:

  • whether a dwelling comprises the whole of a building or structure or more than one building or only part of a building,
  • whether land forms part of the gardens or grounds of the building used for a purpose connected with the enjoyment of the building,

HMRC will look at the specific facts and circumstances and take a pragmatic and common sense approach.

For example a detached garage used to house the family car is part of the residential property but merely because a house is on the same area of land as a factory would not make the factory residential property.

If there is mixed use you should look to establish the primary use.

Examples

An ancillary building that is primarily used for non-residential purposes, perhaps a farmer’s barn but where the farmer occasionally garages his personal car, should be treated as non-residential property if the non-residential use is the primary use.

Alternatively, if a property is a house that has two rooms used as a dental surgery and waiting room the property will be residential property as it is suitable for use as a dwelling.

These issues have a close correlation with issues relevant in dealing with an individual’s entitlement to Capital Gains Tax Private Residence Relief. Extensive guidance on all aspects of that relief is provided in the Capital Gains Tax Manual starting at CG64200 which should be consulted for assistance with related issues arising here.

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Time share and hotels

Paragraph 14 Schedule 29A Finance Act 2004

Timeshare accommodation is residential property whether it relates to a separate property, say a self-contained flat, or to part of a hotel. It covers both rights to use only specific accommodation and rights that whilst attached to specific accommodation, permit use of that or any other accommodation. So, for example, it covers both rights to, say, a two week holiday for 25 years in a hotel in Majorca and rights to a two week holiday for 25 years in a flat in Florida that can be exchanged for a holiday in other accommodation anywhere in the world.

If a pension scheme owns the entirety of a hotel or is a joint owner of the entire hotel then this does not constitute residential property. Hotels, inns and similar accommodation are only residential property where the interest which the person holds directly is part only of the hotel accommodation (that is ownership or joint ownership of a part of the hotel rather than the whole hotel) and is one of the following:

  • the person holds part only of the hotel accommodation, or any estate, interest, right or power in or over such a part and as a result, any person has a right to use or occupy that or any other part of the hotel accommodation,
  • the person has a right to use, or participate in the arrangements relating to the use of, part only of the hotel accommodation or a description of property to which that part belongs.

For example this would include a person that buys a 99 year lease on a single hotel room and as a result has the right to stay in the hotel at a reduced or free rate. It does not matter whether the right to stay in the hotel relates only to the specific leased room or to stay in any of the other hotel rooms.

It will also include the situation where a person has timeshare rights in the hotel, for example the right to stay in the hotel for two weeks every August.

If the person holds an interest in the entire hotel that will not be residential property. This applies whether the pension scheme owns all of the property itself or if the pension scheme is a joint owner of the entire hotel. In this situation the hotel is treated as commercial property.

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Halls of residence for students

Paragraph 8(b) Schedule 29A Finance Act 2004

To be a hall of residence for students a property needs to be connected to a particular educational establishment and provide accommodation on a communal basis for students of that establishment only. The property does not need to be owned by the educational establishment whose students are the sole occupants and the building may or may not be sited on the campus or grounds of the educational establishment.

Deciding whether a property is a hall of residence for students

There are a number of characteristics which assist to indicate whether or not the property in question is a hall of residence for students:

  • an educational establishment identifies the property as one of its halls of residence
  • the educational establishment is involved in placing students in the building
  • the students occupying the building are limited to a single educational establishment
  • the building is not broken up into self-contained apartments with one or more bedrooms
  • there are common living areas or eating/cooking facilities or services provided for the use of all the occupants
  • the individual rooms within the property cannot be acquired or disposed of separately.

Consideration of these characteristics should enable a conclusion to be reached on whether any particular property is a block of flats or a hall of residence for students.

Properties that are not halls of residence for students

It is clear from the above that to be a hall of residence for students it is not sufficient that the accommodation is or may be only let to students. For example:

  • normal houses or flats let to, for example, university students are not halls of residence
  • self-contained apartments within a larger building will be residential property in their own right, not one or more halls of residence for students
  • a multi dwelling house let to students is not a hall of residence simply because it has common living areas or eating/cooking facilities or services provided in the building for the use of all the occupants
  • the accommodation for children in a boarding school will not generally be a hall of residence for students. Instead it will fall within the definition of a home or other institution providing accommodation for children and therefore is not residential property for the purposes of the taxable property provisions.

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Property converted or adapted as residential property

The definition of residential property is a building or structure that is used or suitable for use as a dwelling. It does not therefore apply to property, including land, which is not residential property when the investment-regulated pension scheme acquires it. But the building or structure may become residential property whilst owned by the pension scheme as a result of being subsequently subject to development.

Whilst it is in the course of construction, conversion or adaptation such land and property is not residential property because during that period it is not suitable for use as a dwelling.

Land and buildings being converted are treated as residential property from the point when they become suitable for use as a dwelling.

In any specific case this point should be determined by taking a common sense approach to the facts and circumstances.

Essentially the question to be answered is: would a person normally live in that dwelling?

The point at which this occurs will normally be when the works are substantially completed. In the case of UK property this is likely to be when the certificate of habitation is issued.

A property that is sold before the development or conversion is substantially completed never becomes residential property.

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Permitted ‘job related’ residential property

Two categories of ‘ job related ‘ residential property will not be taxable property whether held directly or indirectly by the investment-regulated pension scheme so these will not be subject to tax charges when held as a scheme investment by an investment-regulated pension scheme. These are where the property is within the categories below:

The property is (or, if unoccupied, is to be) occupied by an employee who:

  • is neither a member of the pension scheme nor connected with such a member,
  • is not connected with the employer, and
  • is required as a condition of employment to occupy the property.

An example is a caretaker’s flat.

The property is (or, if unoccupied, is to be):

  • occupied by a person who is neither a member of the pension scheme nor connected with such a member, and
  • used in connection with business premises held as an investment of the pension scheme.

An example is a flat above a shop that is leased from the scheme with the shop, where the flat is occupied by the trader in connection with them operating their trade from the shop.

Connected person is as defined in section 993 Income Tax Act 2007. See PTM027000.

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Ground rents

These are a type of long leasehold and if they are held in relation to residential property they will also be residential property.