CGT – allocation of sale price on disposal of house and land with development value

CGT – allocation of sale price on disposal of house and land with development value

Fri 21 Nov 2014

The Upper Tribunal (Lands Chamber) reviewed the basis of apportioning the sale price of land between CGT exempt and taxable parts.  They decided HMRC’s approach was fundamentally flawed.  Despite the taxpayers neither appearing nor being represented at the UT hearing, in Oates v HMRC the UT agreed with the taxpayers’ apportionment allocating a far higher proportion to the tax exempt part.

Although unrepresented taxpayers who made no appearance before the UT succeeded in establishing their preferred value,  closer examination shows that had they obtained a proper valuation and been represented,  more value would probably have been apportioned to the CGT-exempt part.

The taxpayers owned a dwelling and contiguous land to the rear.  They sold the entire site for development.  The gain on the house and garden was exempt from CGT as the disposal of a main residence (TCGA s 222), but taxable on the other land.  The question before the UT was: what is the basis for a “just and reasonable” apportionment of sale price as required by TCGA s 52(4)?

The house in Barnsley fronted the street.  The other land had some derelict industrial buildings including a former ice cream factory, but was described as scrub and waste land.  The taxpayers had a valuation from a professional valuer which was very brief and flimsy, allocating £325k to the dwelling and £400k to the other land.  The UT stated it was “singularly lacking in the content required by [the practice direction and the protocol for instruction of experts to give evidence in civil claims] or by the Tribunal” and so should be disregarded.

The HMRC valuation office agency (VOA) researched prices achieved for sales of comparable dwellings in the same street in Barnsley.  On the basis of this evidence the VOA determined that, absent both the additional land and the prospect of development, the dwelling would have sold for £170k.  They tested this by reference to other approaches which produced even lower apportionments to the dwelling.  The VOA asserted that £170k was the amount to apportion to the dwelling, the balance of £555k to the non-exempt disposal.

The UT identified a fundamental flaw in the VOA approach.  They had valued one part of the asset disposed of (the dwelling) without reference to development value but had singularly failed to come up with an existing use value for the other (the scrub land), i.e. the VOA had not produced a current use value for the scrub land.

The approach for the apportionment under TCGA s 52 favoured by the UT was similar to the situation when combining land in separate ownership gives a value greater than the sum of the parts, a so called marriage value.  The price achieved reflected development potential of the total site.  The UT opined that “In a conventional marriage value calculation, the concept that each party cannot realise their share in the development value of their combined interests without co-operating is normally reflected in the marriage value being split equally between the parties.”  Here the development value being treated like a marriage value meant that both the dwelling and the scrub land brought something to the party.  In their flawed approach, the VOA effectively allocated all the development (marriage) value to the scrub land.

The UT worked backwards from the taxpayers’ apportionment (interestingly this is after agreeing with HMRC’s criticism of the report and deciding to place no weight on it!).  Using the taxpayers, value of the dwelling and the VOA formula for allocating marriage value implied a value of £209k for the scrub land.  All the UT had to go on was the description of the land as “scrub and waste” land.  Rather than referring it back for a current use value of the other land, the Judge decided it could not have been worth more than £209k.  On that basis the taxpayers’ allocation of £325k to the dwelling was, if anything, too low.

Thus the UT agreed with the taxpayers’ allocation, and obiter suggested the taxpayer could have justifiably apportioned an even higher proportion of proceeds to the exempt principal private residence disposal.

There is little litigation on the approach to CGT apportionment.  This decision gives useful guidance of the practicalities.

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