In the First-tier Tribunal case of Mr P A Ellis  UKFTT 003 (TC) (published on 9 January) – HMRC tried to argue that the validity of a capital gains tax ‘principal private residence’ (PPR) election could be undermined on the basis that the elected residence was not, as a question of fact, an individual’s main residence.
A married couple had purchased a property in 1999. The property was let until August 2004, after which time the couple used it as a residence. In October 2004 they submitted an election under s 222(5) TCGA 1992 that the property should be treated as their main residence for capital gains tax purposes. They sold the property in March 2005.
HMRC accepted that the property was used as a residence by the couple but argued that notwithstanding the election “…the nature and the extent of the use made by the property did not permit of the conclusion that it was their main residence.”
This was a quite ridiculous argument. The statute clearly states that where an individual resides in more than one property, he or she may choose to which property PPR should apply, by making an election under s 222(5). An election cannot be made in respect of a property which isn’t a residence at all, but there is no requirement that the property has to be the individual’s main residence as a question of fact. What, indeed, would be the purpose of the election if it merely confirmed the factual position?
The First-tier Tribunal quickly rejected HMRC’s argument. Judge Geraint Jones held that:
“[HMRC can] challenge the assertion made by the taxpayer that a particular property is a residence used/occupied by him, but once it is proved or accepted that a particular property is a residence used/occupied by the taxpayer, [HMRC] cannot argue that as a matter of fact and degree that residence is not the taxpayer’s main residence if an election has been made in favour of that property under s 222(5).”
The case is a useful reminder that there are limits to the use of PPR elections i.e. the need for a property to be a residence. It also demonstrates how an election can be used to determine which property should qualify for PPR where there is more than one residence.
The more worrying aspect of this case is that someone at HMRC was prepared to sanction the referral of this case to the tribunal. At some point in the course of this litigation, someone on the HMRC team should have realised that there was no chance of success and conceded the matter, rather than putting the taxpayer to the trouble and expense of the tribunal hearing.
It may be that this is the exception that proves the rule, but practitioners can reflect perhaps that simply because HMRC is prepared to take a matter to the tribunal, it does not mean that they necessarily have a serious case.