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Principal private residence relief is not automatic

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9th Jun 2016
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Jennifer Adams considers a question asked by many clients – 'Is there a minimum time that someone has to live in a property in order to qualify for principal private residence relief (PPR)?

Recent court cases confirm that just a few days is sufficient, but it is the quality of occupation and the expectations regarding the residency rather than the length of time of occupation that determines whether PPR applies.

To claim PPR there must be a 'main residence', however there is the small problem in that the term 'main residence' is not defined in TCGA 1992. The only reference is in s222 TCGA 1992 'relief on disposal of private residence', which states that relief from a CGT charge will be given 'so far as attributable to the disposal of, or of an interest in—

(a) a dwelling-house or part of a dwelling-house which is, or has at any time in his period of ownership been, his only or main residence'.

This lack of clarity has resulted in a number of tax cases being heard, and with no statutory definition then the court must look to precedents for guidance.

Permanence and continuity

In the Capital Gains Tax Manual CG64427 HMRC confirms that the 'residence' is not defined in the legislation, and considers that the term must be given its 'ordinary meaning' being 'the dwelling in which that person habitually lives; in other words, his or her home'.

This quote comes from the (non PPR) case of Goodwin v Curtis (1998) STC 475, in which the taxpayer claimed PPR for a property in which he had only lived for 32 days. It was held that he had not intended to occupy the property as his permanent residence, the Court of Appeal deciding that although the question of whether occupation of a property was sufficient to make a person 'resident' for tax purposes was a question of fact and degree, there must be 'some evidence of permanence, some degree of continuity or expectation of continuity' for the claim to be valid. HMRC will always start with this statement in any case where they seek to disallow a PPR claim.

Recent precedence cases

The case of 'Dutton-Forshaw v HMRC (2015) UKFTT 478 confirms that this expectation of 'permanence' and 'continuity' at the outset can prove to be important in persuading the court to allow the PPR claim.

Reference was made to earlier cases, the judge stating that the need for 'permanence' and 'continuity' should not be overstated rather that it is important to look at the full circumstances to determine whether the property qualifies.

In this case the FTT found that the taxpayer had intended to be based in London on a long-term basis. However, due to circumstances beyond his control, his occupation was shorter than expected. The evidence submitted included application for a parking permit, the joining of a London-based dating agency and attendance at a local Church. Therefore, the claim was allowed despite living in the property for just over 7 weeks.

The case of Paul Gibson v HMRC (2013) TC03021 shows that there is one further consideration - namely  'quality' of occupation. In this case the taxpayer claimed that his original intention had been to extend the property for a family home, but owing to the cost of alterations, he instead ended up demolishing it and rebuilding.

However, he subsequently had to sell the property, again for financial reasons. Prior to the sale he stayed in the property for four or five months, using very basic furniture. The FTT found that the ‘quality’ of occupation was insufficient to make the property his sole or main residence and denied the relief. Again the FTT looked at the degree of 'permanence' or expectation of 'continuity' of occupation and found there to be none.

The case of Susan Bradley v HMRC (2013) TC02560 was the result of a situation that is increasingly common – that of a husband and wife separation – and again shows the importance of evidence for a PPR to be allowed.

Mrs Bradley had separated from her husband, moving into another property that she owned but had previously let. At the same time as the move she placed the property on the market, staying until it was sold eight months later. Mrs Bradley was then reconciled with her husband and returned to the marital home. The FTT dismissed the PPR claim on the grounds that there was no proof that the residence would be any more than a temporary home.

The case of Mitesh Kothari v HMRC (2016) UKFTT 127 proves how far a court considers 'quality' to be of importance. In this case Mr Kothari owned a property which had previously been let. He stated in evidence that the property had become the family home in January 2009, electing at that time for it to be his main residence.

His contention was that he had subsequently been approached by an estate agent who said he could get a good price, and therefore the property was placed on the market. Three months later the property was sold.

HMRC rejected his claim for PPR and the FFT agreed. An important factor was that Mr Kothari was supposedly moving from a four-bedroom house to a two-bedroom flat, even though he had a wife and three young children. He had not moved his own furniture in, and had made no arrangements to change his children's schooling.

The case of Alison Clarke v HMRC (2014) TC4062 shows how far HMRC will go in order to obtain confirmation that their refusal of PPR is valid. In this case evidence from the local council of occupation dates showed that the properties were unoccupied for a long period. Gas bills indicated low consumption, the car had not been registered at the address for which PPR was being claimed and the property was uninsured during the relevant periods.

Practical Tip - suggested documentary evidence:

  • Utility bills in the taxpayer’s own name.
  • Receipts for home insurance, telephone bills, DVLA records or credit reference agency records showing that the address was used as the main residence during the PPR period. Information considered in evidence in the past has included fuel bills which suggested that a property was unoccupied for part of a winter when the taxpayer claimed it was being used as his PPR.
  • The address should be the voting address on the electoral register.
  • Receipts proving purchase of furniture and furnishings for the property. Delivery notes.
  • Bank registration should show the address.
  • The type of mortgage. It would be preferable for the mortgage to be a standard mortgage rather than be a ‘buy to let’. However, many mortgage providers are not adverse to a property originally purchased as a main residence with a standard mortgage becoming a rental property and as such do not require amendment to the type of mortgage.
  • Registration of owner with a local doctor.
  • Dates of advertising for sale.
  • Photographic evidence of residence.
  • Proof of locality in proximity with the owner’s children's school.
  • Residence of a partner – where do they live?
  • Commuting time to the taxpayers' workplace.

And as a final suggestion (which may be going a bit far) - introduce yourself to the neighbours to let people know that you live there.

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Replies (16)

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By Martin B
10th Jun 2016 15:39

For future reference

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By JimH
10th Jun 2016 19:49

Timely article on quality of residence. For a planning conundrum posted earlier for a married couple owning 2 residences where husband owns and lives regularly in the London pad.

I wondered about the quality of residence required of his wife, given he's never nominated a residence, and would be advised to do so. Law requires it to be a joint nomination because they are married. The planning opportunity is for him to first transfer ownership to her, then they make the nomination. But whilst his quality of regular residence, both before letting and since letting ended in the last year, has long been demonstrable, hers is much less so. Just how much does she need to be present and evidenced as such alongside hubby if she were to become sole (or joint) owner? It's that question of quality!

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By Ian McTernan CTA
13th Jun 2016 13:06

I'm glad Jennifer has highlighted what a complex area this can be- even in what can look like very simple circumstances.
I'm dealing with more and more of this sort of case where HMRC are challenging PPR relief claims.
One in particular will probably end up going to the FTT if HMRC can ever stop asking questions and agree to a meeting with the client, which has been refused so far.
If it ever gets resolved I'll be sure to post an article up on it as it has similarities to the Dutton case.

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By Paul Soper
13th Jun 2016 13:11

The Susan Bradley case is the most worrying, if you read the case itself I believe that the Tribunal judge made a fundamental mistake in attributing a motive of sale where the property had been placed on the market and just not taken off, by a woman who the judge accepts was suffering from depression and receiving medication. It was also complicated by the fact that there were two properties that had been one. One, the smaller of the two was vacant when she and her husband separated, but only had a small single bedroom preventing her daughter (who was 16) from visiting overnight. She moved from this into the contentious property when it became vacant some six months later, and then continued to live in that larger property until sale and reconciliation. I'm not sure, having read the case, that she was particularly well represented. These cases can so often be a lottery.

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Morph
By kevinringer
13th Jun 2016 13:29

I have a question about how a sale is declared on the tax return. If someone sells a house which is, say, 75% PPR (because they only lived their 75% of their period of ownership), they declare the full disposal on the CG pages and claim 75% PPR. But if they are entitled to 100% they declare nothing on the CG pages. Normally if someone is entitled to 100% relief (eg roll-over relief) they would still declare the sale then claim the relief. So in the case of 100% PPR is it correct not to declare the sale at all or should we be declaring the sale then claim 100% PPR?

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Replying to kevinringer:
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By Laurence52
13th Jun 2016 13:51

kevinringer wrote:

I have a question about how a sale is declared on the tax return. If someone sells a house which is, say, 75% PPR (because they only lived their 75% of their period of ownership), they declare the full disposal on the CG pages and claim 75% PPR. But if they are entitled to 100% they declare nothing on the CG pages. Normally if someone is entitled to 100% relief (eg roll-over relief) they would still declare the sale then claim the relief. So in the case of 100% PPR is it correct not to declare the sale at all or should we be declaring the sale then claim 100% PPR?

HMRC help notes to the capital gains tax section of the return states:
"You don’t need to fill in the ‘Capital gains
summary pages if you only sell or dispose of:
your main home, if you qualify for Private
Residence Relief on the full amount of the gain"

So you don't need to report it, but if you thought it advisable you could disclose the sale in the white box on the main return.

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By Laurence52
13th Jun 2016 13:45

I was at a SWAT course last week on a capital taxes refresher including PPR.

I asked the lecturer for her personal view as to the minimum amount of time needed for occupancy where HMRC were unlikely to challenge a claim. She said 12 months.

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By qwer78
17th Jun 2016 09:58

Does making an election make it more likely that there will an enquiry on ultimate sale?

As below, if 100% PPR eligible, there is nothing to declare and enquiries and the fuss had by Ian rarely happen.

Client has situation where it might be worth considering an election where the main home is clear to me, but to put it beyond doubt as not all the items on the shopping list of evidence are available. Client would prefer to run with the facts than have an increased risk of an unnecessary fuss on ultimate sale.

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Replying to qwer78:
By JimH
17th Jun 2016 11:20

qwer78 wrote:

Does making an election make it more likely that there will an enquiry on ultimate sale?

As below, if 100% PPR eligible, there is nothing to declare and enquiries and the fuss had by Ian rarely happen.

Client has situation where it might be worth considering an election where the main home is clear to me, but to put it beyond doubt as not all the items on the shopping list of evidence are available. Client would prefer to run with the facts than have an increased risk of an unnecessary fuss on ultimate sale.

I would like thoughts on this too. I put a similar situation to a tax lecturer this week, who simply asked me back 'which is the main residence?' as a matter of fact.

However, I was contemplating a nomination to absolutely secure the stronger residence and ensure the secondary residence wasn't deemed a main residence at the time of a transfer to spouse. The success of the inter spousal transfer for washing out all gains depends on the gifted property not being a main residence.

I am grateful to qwer78 for raising this; should we risk a nomination flagging to HMRC what should, if tested, be a non issue with 2 homes?

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Replying to JimH:
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By Paul Soper
19th Jun 2016 00:27

If you have two properties (or more but just run with two) and both have genuinely been a residence at some time then you are entitled, in law, to decide which is your main residence without any question as to which is actually your main residence. Over the last ten years the vast majority of cases that HMRC have taken to the tribunal have been cases where the taxpayers did NOT make the election and so had to rely on an argument that the property was, at that time, their main residence in fact and they generally failed. If you have evidence that it was a residence election removes the element of doubt. After all how many residences does out Queen have? Balmoral, Windsor, Buckingham Palace, Sandringham - they are all her residences - which is her main residence? If she was taxable(which she isn't) she would use the election under s222(5) to determine which is her main residence BY ELECTION...

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Replying to Paulsoper:
By JimH
19th Jun 2016 10:12

Paulsoper wrote:

If you have two properties (or more but just run with two) and both have genuinely been a residence at some time then you are entitled, in law, to decide which is your main residence without any question as to which is actually your main residence. ... If you have evidence that it was a residence election removes the element of doubt....

Yes, as I understand HMRC to instruct in their guidance.

So I'm intrigued why a tax lecturer suggested to 'let it be' (ie not nominate first home as the main residence) unless because it raises a red flag when nominations are changed on a new ownership. It concerns a spousal transfer of a 100% owned city flat by one spouse 100% to the other spouse, washing out all the gain accumulated to transfer.

From Nichola Ross Martin, I understand this only happens on a transfer between spouses/CPs of a property which wasn't a main residence at the time of transfer. The couple can then elect second home as PPR and keep using before eventual PPR relieved sale. Seems too good to be true which makes me consider the GAAR.

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Replying to JimH:
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By Paul Soper
20th Jun 2016 11:43

The election under s222(5) can only be made within two years of the acquisition of a second or subsequent residence and a transfer between spouses will not be an effective acquisition for this purpose - hence you could argue that making an election that can't be made is going to attract interest from HMRC. On a transfer between spouses the assets transfers not at the MV at the date of transfer but at a price which gives rise to neither gain nor loss at the date of the transfer, since the abolition of indexation allowance this is usually equal to the cost of acquisition plus any subsequent enhancement expenditure. If the couple, or one of them acquires another property this can revive the right to make the election.

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Replying to Paulsoper:
By JimH
20th Jun 2016 17:12

Paulsoper wrote:

If the couple, or one of them acquires another property this can revive the right to make the election.

The client has recently changed his combination of residences through tenant leaving the property he'd transfer, so is in good time to nominate.

Think I'd be happier if he lets the property again whilst in his sole ownership, then transfers whilst let. This puts beyond doubt it's use when transferred.

But he shouldn't need to! the nomination of the other (first) home, whilst there are 2 occupied residences and before transfer should suffice.

I'm not happy about leaving the status open to HMRC's view, but alarmed at 1) a tax lecturer's suggestion it is left and assumed a matter of fact and 2) multiple nominations either side of a transfer possibly raising a red flag.

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Replying to JimH:
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By Paul Soper
21st Jun 2016 22:45

Can I suggest you read the legislation, if a property which was let is acquired with the tenant in place, then the two year period runs from the date of the enant leaving but this is not what you said at the beginning - by the way, I am a tax lecturer. Maybe you need to get into the habit of setting out the full facts if you want a full answer...

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Replying to Paulsoper:
By JimH
22nd Jun 2016 10:06

Many thanks for your input Paul. Always appreciated. The fact that tenant left last year is in my very first post above; but agree it gets lost in what follows. Pretty familiar with the leg and manuals, not so familiar with how it pans out in practice. So value the feedback. Thanks. Jim

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By AndrewV12
17th Nov 2016 14:45

The trouble with PPR and clients is that some clients rent out multiple properties and when one is sold, guess which one they claim is their PPR.

Mind you if just a few days is sufficient ;)

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