CG64663 - Private residence relief: non residential use: part of house used exclusively for business
S224(1) TCGA92 only excludes from relief any part of the dwelling-house which is used exclusively for the purposes of a trade, business, profession or vocation. So a room which is used partly for business purposes and partly for residential purposes will qualify in full for relief.
For example, the kitchen of a small guest-house may be used equally to provide meals for the resident owner and to provide meals for the guests. As the kitchen is not used exclusively by the owner for the purposes of the trade s224(1) TCGA92 cannot be used to restrict relief. Although a proportion of the expense of heating and lighting the kitchen, together with fuel for cooking, may be wholly and exclusively expended for the purposes of the trade and as such be deductible in computing the profits chargeable as income, it does not follow that a similar restriction should be made to the private residence relief.
Where a room has been used exclusively for the purposes of a trade, business, profession or vocation the apportionment required by s224(1) TCGA92 should be made by reference to the facts relating to the dwelling-house. Any private use fraction agreed for the purposes of computing profits chargeable as income provides a poor guide to the apportionment required by s224(1) TCGA92 and should only be used if no other evidence is available.
The exclusive use test is a stringent one and you should not usually seek any restriction to relief for a room which has some measure of regular residential use. But occasional and very minor residential use should be disregarded. For example, if a doctor keeps private possessions in a room used as his or her surgery the surgery should still be regarded as exclusively in business use.
Apportionment
How much of the total gain accruing on the disposal of a dwelling-house is attributable to the residential and how much to the business parts of that dwelling-house is a question to be decided on the facts of the particular case.
In a mixed property, such as a public house with residential accommodation above, the business part would be expected to be of greater value than the residential. So an apportionment based solely on the number of rooms or the floor area used for each purpose could produce an excessive amount of relief. In small cases any reasonable apportionment may be accepted. If the tax at stake is material or the apportionment appears to have been unduly weighted in favour of the residential accommodation the Valuation Office Agency should be consulted. Form CG20 should be used and the Valuation Office Agency should be asked to apportion the consideration received, as well as any deductible cost or valuation, see CG74300. The example provided below illustrates the valuations and apportionments needed. The Valuation Office Agency will apportion the consideration in proportion to the value of the respective parts of the property.
You will occasionally see computations based on a valuation of the residential accommodation in isolation as if it were a separate house. That valuation is then deducted from the consideration as a measure of the proportion of the gain which attracts relief. Such an approach is not a proper apportionment and will produce an excessive amount of relief.
Example
J acquired the freehold of a public house in June 1980 for £40,000. He sold it in January 2021 for £720,000 net of costs.
The public house consisted of three rooms used exclusively for business, a kitchen used both privately and for business, and six rooms used as his only residence.
The following Capital Gains Tax computation was submitted:
- | - | £ |
---|---|---|
- | Disposal proceeds | 720,000 |
less | Value at 31 March 1982 | 100,000 |
- | Gain | 620,000 |
- | Private residence relief 7/10 | 434,000 |
- | CHARGEABLE GAIN | 186,000 |
The private residence relief fraction is based on seven rooms out of ten being used as J’s residence. In these circumstances you will need to obtain the following from the Valuation Office Agency:
- a valuation of the public house at 31 March 1982, see CG74300;
- an apportionment of the value at 31 March 1982 between the three rooms used exclusively for business and the rest of the property;
- a similar apportionment of the consideration received.
The Valuation Office Agency reached agreement with J that the value of the public house at 31 March 1982 was £80,000 of which £48,000 should be apportioned to the three business rooms. It is agreed that £432,000 of the sale consideration can be apportioned to the business rooms.
The Capital Gains Tax computation is revised as follows
- | - | Business - £ | Private - £ |
---|---|---|---|
- | Disposal proceeds | 432,000 | 288,000 |
less | Value at 31 March 1982 | 48,000 | 32,000 |
- | CHARGEABLE GAIN | 384,000 | 256,000 |
- | - | - | (exempt) |