CGT: When a house is not a home
Principal private resident relief normally applies on the sale of a home which has been occupied by the taxpayer for the full period of ownership. Jerome Lane examines some situations in which HMRC may refuse a claim for PPR.
TCGA 1992, s 224(3) states that principal private resident (PPR) relief can be refused where the acquisition of a home was made with a motive to make a profit: potentially exposing all disposals!
HMRC’s own guidance in the Capital Gains manual (CG65210) makes it clear that the legislation should only be applied where a short-term gain was clearly sought. This still leaves a little uncertainty, as the application of the rules is open to interpretation.
An obvious trigger to an HMRC check would be when the property is sold at a significant gain after only a short time. For the savvy investor, the 'flip' strategy can yield fantastic returns in a short time. However, where a claim is made for PPR relief at the same time, the stakes are much higher, especially if the process is repeated.
HMRC also recognises that intentions change, giving examples of scenarios where work has been undertaken to maximise gains (CG65240). PPR relief is then restricted on an element of the gain rather than the whole amount. It does seem that HMRC tries to be pragmatic.
HMRC can refuse PPR relief on any part of a gain on the disposal of a main home where the property, or part of it, is used exclusively for the purpose of a trade, business, profession or vocation (TCGA 1992, s 224).
Advisers will be familiar with encouraging clients to ensure that no part of their home is used exclusively for business purposes, which is usually enough to negate this particular issue, and also to prevent business rates applying on the enterprise.
Two or more homes
Complications often arise in situations where there are two or more homes that could qualify as the main residence. These can usually be decided on an analysis of the facts. This can include extensive enquiries into such items as electoral rolls, council tax records, utility bills, schools and even where individuals are registered for medical services such as doctors.
The recent Martin Fitzjohn vs HMRC case (TC07291), won by HMRC, examined whether the disposal of two properties held for a relatively short period of time actually qualified for PPR relief that had been claimed over a decade earlier.
The defendant had separated from his wife before purchasing and disposing of three properties in just two years. He returned the first disposal on his tax return on the basis that occupation and intention wasn’t sufficient for a PPR claim.
Fitzjohn excluded two later disposals believing that PPR relief would apply. He had identified that the first disposal was that of a dwelling which was not his main home for PPR purposes due to the quality of occupation.
The unsuitability of the areas and property to accommodate his children during visitation were cited as reasons for the subsequent disposals, which made more than reasonable gains in a matter of months. The case very much rested on the intention, the substance and quality of occupation that Fitzjohn held.
The evidence provided by HMRC displayed the defendant's hopes of marriage reconciliation and this aspiration played a part in Fitzjohn’s downfall since it followed, in HMRC’s eyes anyway, that he could not be treating the dwellings as permanent homes.
Fitzjohn’s case was further blighted because he was a local estate agent with knowledge of the area and the likely uplift on certain properties. There was an element of suspicion that he was acting for personal gain when he made the acquisitions.
This, and other similar PPR cases, highlight the importance of ensuring your clients get full, considered advice on whether PPR relief should apply on the disposal of a former main home, especially if there are any extraordinary circumstances.
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Jerome is a private client tax advisor with Stewart & Co Chartered Accountants and Business Advisors providing tax advice to individuals, businesses, trustees, solicitors and other accountants, with a focus on property taxation and estate planning.