From http://www.hmrc.gov.uk/manuals/cgmanual/CG65550.

htm HM Revenue & Customs Taxation Manual

Section 226 of the Taxation of Chargeable Gains Act

Home CG65550 - Private residence relief: dependent relative: introduction TCGA92/S226 In addition to the relief which may be due on the disposal of a person's own residence relief may also be due on the disposal of a residence which has been provided for a dependent relative. But this relief is not available in respect of or any residence acquired after 5 April 1988 any residence acquired before that date unless the conditions for relief were met by that date.

The following conditions must be fulfilled. The dependent relative must occupy the dwelling house rent free and without any other consideration, see CG65600+. Only one dependent's dwelling house can qualify at any one time, see CG65660. A husband and wife or civil partners of each other who are living together can claim relief for only one such dwelling house between them, see CG65590+. The dwelling house must be the sole residence of the dependent relative, see CG65660CG65661. The dwelling house must have been acquired before 6 April 1988 and the conditions above fulfilled in relation to a dependent relative before that date, see CG65670+.

CG65570+ explain what persons can be considered to be dependent relatives. In this context it should be noted that to trigger relief the dwelling house does not have to be only occupied by dependent relatives. For example, if an individual's father is a dependent relative because of his age but that individual's mother is not, occupation of a dwelling house by the individual's father can give rise to relief even if the individual's mother also resides in the dwelling house. CG65560 - Private residence relief: dependent relative: amount of relief If a dwelling house is occupied by a dependent relative and the other conditions for relief are fulfilled relief is given in the same way and for the same periods as private residence relief on an individual's own residence. So, in addition to periods of actual residence by the dependent relative the final period exemption allowed by TCGA92/S223 (2), see CG64985+ will apply. An example illustrating how the relief is computed is at CG65680. CG65570 - Private residence relief: dependent relative: introduction TCGA92/S226 (6)

Section 226 of the Taxation of Chargeable Gains Act

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There are two categories of persons, listed at TCGA92/S226 (6), who may be regarded as dependent relatives. In relation to an individual these are any relative of his or of his wife who is incapacitated by old age or infirmity from maintaining himself or herself, or his or his wife's mother who, whether or not incapacitated, is either widowed, or living apart from her husband, or a single woman in consequence of dissolution or annulment of marriage. If the individual is a woman references to a wife should be read as references to a husband, TCGA92/S226 (7). The categories are not exclusive. For example, if the individual's mother does not fall into the second category, see CG65579+, she may still fall into the first. CG65573 - Private residence relief: dependent relative: introduction The income of the dependent relative is not a factor which you should take into account in deciding if relief is due. The dependent relative does not have to be financially dependent on the person who claims the relief. CG65574 - Private residence relief: dependent relative: who is a relative? The legislation does not define who may be regarded as a relative. You should include the following a blood relation a person who, while under the age of 16 years was an `adopted child' of the claimant the husband or wife (or widow or widower) of a blood relation. For example, a stepfather (or mother), a son (or daughter)-in-law, an aunt's husband, an uncle's wife a stepbrother (or sister) and a stepson (or daughter) - whether a blood relation or not a foster parent and a foster brother (or sister) where the foster parent had custody of and maintained the foster child at his or her own expense when the child was under the age of 16 a blood relation of the claimant's deceased wife (or husband). CG65575 - Private residence relief: dependent relative: incapacitated by old age There is no legal definition of `old age'. You can accept that a relative is incapacitated by old age if he (or she) is aged 65 or over aged between 55 and 65, unemployed and, due to age, without the capacity to work again in his or her own industry.

The second test is not met if the relative is unemployed because of a general lack of jobs or if, because of age, the relative chooses not to work. CG65577 - Private residence relief: dependent relative: incapacitated by infirmity A relative is infirm if he or she is mentally ill, physically disabled or chronically sick and is unable to support himself or herself by working. But he or she must be over the school leaving age to qualify as a dependent relative. You should not consider a child who is under the school leaving age to be a dependent relative no matter how infirm that child may be. This is because the law makes it compulsory for a child to attend school. It is the legal obligation which prevents a child from maintaining itself and not its infirmity.

Section 226 of the Taxation of Chargeable Gains Act CG65579 - Private residence relief: dependent relative: mother or spouse's mother

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If the claim is made in respect of a dwelling house occupied by the claimant's mother, or the mother of his wife or her husband, there is no requirement that the mother should be old or infirm. If the dwelling house is to attract relief the mother must be a widow, or living apart from her husband, or a single woman in consequence of dissolution or annulment of marriage. The stepmother of an individual, or of that individual's wife or husband, will not qualify under this paragraph but is a relative and may qualify under CG65574 if the more stringent conditions explained at CG65575-65578 are fulfilled. If the individual's mother or mother-in-law has never been married she cannot fall within any of the three categories above. But you should allow relief if, had she been married, one of the categories would apply to her. For example, if an individual's parents never married but she provided a dwelling house for her mother after her father died her mother should be regarded as a widow. CG65590 - Private residence relief: dependent relative: husband and wife and civil partners When checking a claim by a married person or by a civil partner in respect of a residence occupied by a dependent relative you should ensure that relief for the same period or any part of it has not been allowed to the other spouse or civil partner if the other spouse or civil partner has provided a residence to a dependent relative and so could make a claim for the same period, that they are aware that no further claim can be made and that any claim which has been made must be given up. The limit to one house between them for a husband and wife or for civil partners of each other is at TCGA92/S226(4). For years before Self Assessment, see CG10301, power to obtain the confirmation set out above was given by Section 226(5). In January 1983 a husband buys a house which is occupied from that date as the sole residence of his widowed mother. In January 1984 his wife buys a house which is occupied as the sole residence of her aged father. In January 1988, following the death of her father, the wife's house is sold. Relief is claimed and will exempt the whole of the gain. In January 1990 the husband's mother dies and his house is sold in January 1992. His period of ownership is 9 years. His mother occupied the house as a dependent relative for 7 years of which 4 years cannot be claimed because relief has been given to his wife. So relief is available for the remaining 3 years of the husband's mother's occupation, 1983, 1988 and 1989, together with the final 2 years of ownership (in accordance with TCGA 1992 section 223(1), and 5/9 of the gain on disposal is relieved. CG65600 - Private residence relief: dependent relative: rent free TCGA92/S226 (1) For relief to be due the individual making a claim to relief in respect of a gain on the sale of a dwelling house must have provided that dwelling house to his or her dependent relative rent free and without receiving any other consideration. Usually this condition will not present any problems but there are three areas which may cause difficulties. Where a small payment is made by the dependent relative to cover expenses, see CG65610+ Where the dwelling house has been transferred from the dependent relative to the claimant and the dependent relative has remained in residence, see CG65625+

Section 226 of the Taxation of Chargeable Gains Act

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Where the dependent relative also has an interest in the dwelling house, see CG65640+.

CG65610 - Private residence relief: dependent relative: rent free: payments made ESC/D20 TCGA92/S226(1) refers to the payment by the dependent relative of `any other consideration'. So, on the wording of the legislation, any payment by the dependent relative to the claimant will prevent relief. Interpreted literally this is unduly restrictive and is relaxed by ESC/D20, the text of which is reproduced in leaflet IR1. Relief will not be lost where the dependent relative pays all or part of the occupiers council tax or rates, and/or pays the cost of repairs attributable to normal wear and tear, and/or makes other payments, provided that no net income is receivable by the individual, taking one year with another. It does not matter if the payments are to the individual claiming the relief, for example, a contribution to his or her payment for repairs, or direct to a third party. This is illustrated by the examples at CG65616. CG65613 - Private residence relief: dependent relative: rent free: payments made The income receivable by the claimant should be taken to include all sums received from the dependent relative as consideration for the provision of the property. This should include sums received towards repaying the mortgage, both interest and capital; whether received directly from the dependent relative or paid by the dependent relative to the mortgagee. Deductions to arrive at net income Against these receipts should be set sums paid by the claimant, or directly by the dependent relative, which would be deductible in computing income receivable under Schedule A, see AP1576. So no deduction can be made for payments of mortgage interest or capital. This is illustrated by the second example at CG65616. Community Charge Community charge paid by the dependent relative or by the claimant, whether or not reimbursed by the dependent relative, should be ignored because it is a personal liability not a payment in respect of the property. CG65616 - Private residence relief: dependent relative: rent free: payments made ESC/D20 For many years A has provided a residence to his father. His father pays the council tax each year. In one year A spent 2,000 redecorating the house. His father contributed 1,000 towards the cost. These payments by the father to his son and by the father direct to the local authority fall within ESC/D20 and so do not jeopardise A's claim to relief under TCGA92/S226. ESC/D20 B buys a house for her mother, paying for it by a mortgage of 30,000. B pays the council tax of 400 each year. She also pays 200 each year on average on repairs and other outgoings in respect of the property. Her mortgage repayments are 3,000 each year to which her mother contributes 1,000. B is not entitled to dependent relative relief and is not assisted by ESC/D20. She receives 1,000 each year from her mother which is treated, for this purpose only, as income receivable under Schedule A.

Section 226 of the Taxation of Chargeable Gains Act

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Against that the expenses which would be deductible under Schedule A total 600 leaving her a net profit of 400. The mortgage payments of 3,000 are not deductible under Schedule A and so play no part in the computation. CG65625 - Private residence relief: dependent relative: rent free: xfer from It is common for dwelling houses to be transferred between members of a family without any cash consideration being paid. A house may be passed to a younger generation, for example from parents to children, in order to mitigate the effect of Inheritance Tax on the parents. The parents will usually remain in occupation of the dwelling house and, when that dwelling house is eventually sold, the children may claim relief under TCGA92/ S226 on the basis that their parents were their dependent relatives. If the transfer of the dwelling house has been made on the basis of an explicit agreement that the transferor will continue to reside in it, it may be possible to show that relief is not due as the property has not been provided without any other consideration, see CG65630. But each case depends on its own facts and it cannot be assumed that an agreement existed. CG65630 - Private residence relief: dependent relative: rent free: xfer from Where there is clear evidence of an explicit agreement, the transfer of the dwelling house from the dependent relative to the claimant is itself consideration received by the claimant for allowing the dependent relative to remain in occupation. The word `consideration' is being used in TCGA92/S226(1) in its legal sense as `Anything regarded as recompense or equivalent for what one does or undertakes for another's benefit, especially in the law of contract - the thing given or done by the promisee in exchange for the promise'. It is necessary to demonstrate that the transfer of the dwelling house was made in exchange for a contractual undertaking by the claimant to allow the dependent relative to remain in occupation. This is a question of fact which may need to be demonstrated to the satisfaction of the Tribunal. Consequently in the absence of clear evidence that an agreement was entered into at the time of the transfer of the dwelling-house, and its terms, it will not be possible to demonstrate that relief is not due. It may be suggested that this is not the sort of consideration which is intended by the legislation. Because the whole phrase is `rent free and without any other consideration' it is inferred that the consideration to which the Act refers must be similar to rent and must be paid during the period of occupation and not at the beginning of it. This argument should not be accepted. The phrase `any other consideration' is written in the widest possible terms and was clearly intended to be interpreted widely. CG65640 - Private residence relief: dependent relative: rent free: interest in You may see claims to relief under TCGA92/S226 where the dependent relative has an interest in the dwelling house together with the person who is claiming relief. For example, a mother and son are joint owners of the house in which the mother lives. This will commonly come about for one of two reasons asset splitting - where the dependent relative originally owned the whole and has transferred a part, see CG65642 financial assistance - where the dependent relative could not afford a house and has been assisted by the claimant, see CG65645.

Section 226 of the Taxation of Chargeable Gains Act CG65642 - Private residence relief: dependent relative: rent free: asset splitting

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Unless there is clear evidence of the transfer of a part interest in the dwelling-house in consideration for a right of continued occupation, see CG65630+,relief will be due on disposal of the part interest. CG65645 - Private residence relief: dependent relative: rent free: financial help In cases of this type, the claimant and the dependent relative will each acquire part interests in the dwelling house, as beneficial tenants in common, see CG70500+. Those part interests will be proportional to the respective financial contributions made towards the purchase price of the house. For example, if the claimant has contributed 40,000 towards a dwelling house for a dependent relative costing 60,000, then they will have a 2/3rds interest in the house in respect of which they will be entitled to relief under TCGA92/S226 when the house is sold, assuming other conditions for the relief are met. When considering relief on part interests which have been acquired in this way, you should not enquire into whether the dependent relative could have afforded the dwelling house without financial assistance from the claimant. The fact that the claimant has a part interest in the house as the result of their financial contribution to its purchase is sufficient to trigger the relief if the other conditions are fulfilled. s & advisers CG65660 - Private residence relief: dependent relative: sole residence The periods which qualify for relief are those in which the house is occupied as the sole residence of the dependent relative. This is required by TCGA92/S226 (1) and may be contrasted with the relief available to individuals and to the trustees of settled property where the relief is available in respect of an individual's, or a beneficiary's, only or main residence. There is no opportunity to elect for a property to be regarded as the residence of a dependent relative which qualifies for relief. This is because the purpose of the legislation is to allow relief to a person who buys a home for their dependent relative who would otherwise have nowhere to live. The extra relief would not be needed if the dependent relative had another residence available. Not more than one dwelling house can qualify for relief as the residence of a dependent relative at any one time except where one dwelling house only qualifies for relief by virtue of the final period exemption of TCGA92/S223 (2), see CG64985+. Where a person fulfils the conditions at CG65550 for only part of the period of ownership, and so is only a dependent relative for part of the period of ownership, relief should only be allowed for the period during which the person was a dependent relative. For example, an individual buys a dwelling house in January 1984 which is occupied as the sole residence of his parents who are each aged 50. His father dies in January 1985 and his mother continues to live in the dwelling house. If the other conditions for relief are fulfilled relief will only be available from January 1985. After that date the individual's mother is a dependent relative within CG65579. Before that date neither mother nor father are dependent relatives and so relief cannot be due. CG65670 - Private residence relief: dependent relative: at 5/4/88: conditions For disposals on or after 6 April 1988, relief is available if the dwelling house was acquired before 6 April 1988 and at some time since its acquisition and before 6 April 1988 it was occupied as the sole residence of a dependent relative and the other conditions for relief are satisfied. CG65671 - Private residence relief: dependent relative: at 5/4/88: qualifying Where the gain on a disposal qualifies for this transitional relief the following periods will qualify

Section 226 of the Taxation of Chargeable Gains Act

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any period before 6 April 1988 in which the dwelling house was the sole residence of a dependent relative any period after 5 April 1988 in which the dwelling house was the sole residence of the dependent relative who occupied it on that date the final period of ownership allowed by TCGA92/S223 (2), see CG64985+.

A period of occupation as the sole residence of a dependent relative which begins on or after 6 April 1988 does not qualify. This is illustrated by the example at CG65681. This limitation to dependent relative relief was introduced in the 1988 Finance Act and, in effect, closes the class of qualifying properties at 5 April 1988. To have simply abolished the relief at that time would have been unfair to any person who had incurred the expense of provided a dwelling house to a dependent relative in the expectation that relief would be due. Relief will continue to be due to anyone who had provided a dwelling house to a dependent relative before 6 April 1988 in respect of that dwelling house as long as it is occupied by that dependent relative. So to that extent, dependent relative relief can still arise after 6 April 1988. But no new houses can qualify for the relief in respect of the occupation by a dependent relative after 6 April 1988. Houses which already qualify because of occupation by a dependent relative before 6 April 1988 cannot qualify for a period after that date as a result of occupation by a different dependent relative. CG65680 - Private residence relief: dependent relative: at 5/4/88: sole residence D acquired a dwelling house in June 1985 and sold it in December 1992 realising a gain of 50,000 before relief. The house was provided rent-free and without any other consideration as the sole residence of D's widowed mother from 1 June 1985 to 1 October 1989 when she died. The private residence relief due under TCGA92/S226 is computed as follows period of ownership June 1985 - December 1992 = 91 months period of sole residence of dependent relative

June 1985 - October 1989 = 53 months final period allowed by TCGA92/S223 (2) = 36 months

The relief due is 53+36 x 50,000 = 48,902 91 The chargeable gain is 1,098 before annual exempt amount. CG65681 - Private residence relief: dependent relative: at 5/4/88: transitional E acquired a dwelling house in April 1978 and sold it in April 1992 realising a gain of 60,000 before private residence relief. The house was let from April 1978 to March 1981 and then occupied rent free and without any consideration as the sole residence of E's widowed mother from April 1981 to March 1989 when she died and E's widowed mother-in-law from May 1989 to April 1992 when the house was sold.

The private residence relief due in accordance with TCGA92/S226 is computed as follows period of ownership 31 March 1982 - March 1992 = 120 months period of sole residence of E's widowed mother

Section 226 of the Taxation of Chargeable Gains Act 31 March 1982 - March 1989 = 84 months final period allowed by Section 223(2) = 36 months

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The relief due is 84+36 x 60,000 = 60,000 120 The gain arising is wholly relieved.