PPR election

My client is a property developer based in London during the week with a family home in the country where he and his family live the rest of the time. He had a London flat where he used to stay on occasions during the week for convenience. His wife never stayed there and neither did his children who go to school local to the country residence. The flat was in joint names with his wife.

My firm was appointed to act within 2 years of him selling the London flat (at a significant profit as it was during boom times in 2006/7). We submitted an election under S.222 TCGA 1992 in joint names for the flat in good time and a month later submitted an election for the family's country residence. The guidance states that provided a property has been used as a taxpayers home an election will be valid irrespective of how long he lived there. In other words a taxpayer cannot nominate a property he has never lived in but otherwise once an election is submitted it is beyond question.

HMRC are enquiring into his return and on the subject of the London flat are saying "The information I hold suggests the property (the London flat) was disposed of at a substantial gain and in view of your client's claim that the gain is exempt I would like to see more evidence that your client satisfies the conditions for relief. Based on information held your client does not appear to meet the criteria for relief so please provide full documents in respect of the acquisition and sale and any enhancement expenditure."

Any thoughts or comments would be appreciated? Is it a potential problem that the client's wife never stayed there and therefore although it was a residence of the husband's it was not of the wife's?