Tax exemption — Private residences — Disposal — Sale of gardener’s cottage — Cottage situated 175 m from main house — Whether private residence exemption applicable on disposal of cottage — Whether within “curtilage” of main building — Whether “outside permitted area” intended by exemption — Correct test propounded — First instance decision in favour of taxpayer — Revenue’s appeal allowed
In 1968 a taxpayer purchased a property known as Newlands, Crockham Hill, Kent, for £34,501. Included in the purchase were two cottages known as 1 and 2 Hop Cottages (formerly an oast house) on the southern boundary of the property. The total area of the property was 10.5 acres. The distance between the nearest points of 1 Hop Cottages and Newlands was approximately 175 m. In 1979 the taxpayer was elderly and living alone and she converted 1 Hop Cottages for the gardener to move into to be nearer to the main house in case she needed assistance. The cottage was subsequently sold for £33,000 and the taxpayer claimed a capital gains tax (CGT) exemption under section 101(1) of the Capital Gains Tax Act 1979 as a disposal of part of her private residence. The General Commissioners concluded that the sale attracted the CGT exemption. The Revenue appealed to the High Court arguing that although a separate ancillary building might be regarded as part of a taxpayer’s residence, it would have to be situated within the “curtilage” of the main dwelling and a cottage 175 m away did not satisfy that test. The High Court confirming the Commissioners’ decision, said that in considering whether the cottage was part of the taxpayer’s dwelling-house the entity which in fact constituted the residence had to be determined. On the facts in this case the entity constituting the taxpayer’s residence included the cottage because the taxpayer’s life-style embraced use not only of the main house with its gardens but also of the cottage occupied by the gardener. The fact that the cottage was about 175 m distant from the house was not of paramount importance in the context of the taxpayer’s use of the property as a whole. The Revenue appealed to the Court of Appeal. Section 101 provides that it applies to the disposal of, or of an interest in, “(a) a dwelling-house, or part of a dwelling-house” which is the taxpayer’s only or main residence, or “(b) land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area”. In the section the “permitted area” means one acre or, if larger than one acre, an area to be determined by the Commissioners with “regard to the size and character of the dwelling-house…”.
Held The appeal was allowed.
1. The current state of authorities was unsatisfactory: see Batey v Wakefield (1981) 55 TC 550; Markey v Sanders (1987) 60 TC 245; and Williams v Merrylees (1987) 60 TC 297. Therefore it was necessary to go back to the words of the statute. What had first to be determined was what in the particular case constituted a “dwelling-house”. That was an ordinary English word of which the definition in the Shorter Oxford English Dictionary was “a house occupied as a place of residence”. “Dwelling-house” could, following the decision of the Court of Appeal in Batey, consist of more than one building, even if the other building itself constituted a separate dwelling-house. Nevertheless, one was looking for an entity which could sensibly be described as a dwelling-house though split up into different buildings performing different functions: see Vinelott J in Williams v Merrylees.
2. To identify an entity in any given case attention had to be focused on the dwelling-house which was said to constitute the entity. To seek to identify the taxpayer’s residence might lead to confusion because where, as in the present case, the dwelling-house formed part of a small estate, it was all too easy to consider the estate as his or her residence and from that to conclude that all the buildings on the estate were part of the taxpayer’s residence.
3. No building could form part of a dwelling-house which included a main house unless that building was appurtenant to, and within the curtilage of, the main house. The Court of Appeal had emphasised the smallness of the area comprised in the curtilage: see Methuen Campbell v Walters [1979] QB 525 and Dyer v Dorset County Council [1989] QB 346.
4. Under section 101(2) and (3) the “permitted area” of garden and grounds which was exempt from CGT was limited to one acre or such larger area as the Commissioners might determine was required for the reasonable enjoyment of the dwelling-house as a residence. It seemed remarkable that a separate lodge or cottage which by any reasonable measurement must be outside the permitted area could nevertheless be part of the entity of the dwelling-house.
5. If the Commissioners in the present case had applied the right test: “Was the cottage within the curtilage of, and appurtenant to, Newlands, so as to be part of the entity which, together with Newlands, constituted the dwelling-house occupied by the taxpayer as her residence?” they could not have reached the decision they did. The fact that the cottage was 175 m from Newlands, that Newlands was on the northern boundary and the cottage on the southern boundary of the 10.5-acre estate, and that they were separated by a large garden with no intervening buildings other than the greenhouses and the tool shed led to the inescapable conclusion that the cottage was not within the curtilage of, and appurtenant to, Newlands and so was not part of the entity which, together with Newlands, constituted the taxpayer’s dwelling-house.
6. The judge had also adopted the incorrect test when he referred to “the entity constituting the taxpayer’s residence”.
Nicholas Warren (instructed by the solicitor for the Inland Revenue) appeared for the Inland Revenue; and David Milne (instructed by the taxpayer) appeared for the taxpayer, Mrs Susan Newlands.
