Meg Saksida exposes the pitfalls and planning points of what ‘residence’ really means.
The issue
The PPR is a valuable relief which can exempt up to 100% of a gain and is given on the disposal of a dwelling when the taxpayer has used the property as their home. The problem is the legislation is not very clear on what ‘residence’ actually means in practice. The precise wording of s 223 TCGA 1992 states:
“This section applies to a gain accruing to an individual so far as attributable to the disposal of, or of an interest in 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….”
‘Residence’ is not further defined, although, as with most legislation, the normal meaning can be imposed, which HMRC defines as ‘the dwelling in which that person habitually lives’. Can we, therefore, simply (habitually) live in a house for a week or does it need a month’s habitual residence in order to make a valid claim for PPR, or does it need six months or longer? And how do we need to ‘live’ in the dwelling house? Is it sufficient to merely regularly sleep in the home to be ‘resident’ in it, or are there other activities such as the laundry or eating meals that need to take place as well?
As the legislation does not cover these questions, we need to turn to case law. Over the years and through a number of hearings, case law has shown us that we need three elements in order to secure PPR on our main residence. These are the quantity of occupation, quality of occupation and intentions of the taxpayer to stay in the property.
Quantity of occupation
The quantity of residence refers to how long the taxpayer has lived in the dwelling. This is always a factor but by no means the most important. Although time spent in the house is crucial to establish habitual residence, PPR can be gained by as little as two weeks spent living in the property. However, other taxpayers have lived in their homes for several months and failed to achieve PPR. In order to succeed with a claim for PPR where there has been a brief or transitory residence, a clear degree of permanence will need to have been established in, albeit, a short time. The shorter the quantity of the residence, the greater degree of permanence will be required to achieve the relief. In Moore v Thompson, Millett J stated:
“…even occasional and short residence in a place can make that a residence; but the question was one of fact and degree [of residence].”
In Morgan v HMRC [2013] UKFTT 181 (TC), a young man purchased a property for himself and his fiancée. She broke off the engagement and the relationship just before they were due to move into the property, so he moved in alone. At the time of moving, he fully expected that she simply had ‘cold feet’ and would ‘come around’. He therefore (alone) carried out all the expected actions that one would take on permanently moving into a house. He changed his address with all his contacts, including his bank and credit cards, he told all of his friends that he had moved, he moved his furniture and clothes in, and he started to live in the house. He waited for her to change her mind. When two weeks had passed, and she had not changed her mind, he realised he could not afford the mortgage on his own and enquired about letting the property. Despite having only lived in the house (before making enquiries to move out) for two weeks, he secured main residence relief because of the extent of the ‘degree of permanence’ that existed at the time he had moved in.
Quality of occupation
The quality of residence is how strongly the taxpayer has lived in the dwelling. Again, although this is always an important factor, it is not the most important. The quality of occupation determines how often and how much the taxpayer uses the dwelling. Sufficient quality of occupation would be reflected by using the house as a home, sleeping there, cooking and eating there, entertaining there, doing jobs such as the laundry and the garden, and generally spending time in the property. Moving one’s own furniture in and decorating the home to the taxpayer's taste would also be good indicators of quality. In Wade Llewellyn [2013] UKFTT 323 (TC), it was held that moving in with a sleeping bag only, and doing all your eating, washing and socialising elsewhere, was not enough quality for PPR.
However, all the quality and quantity in the world cannot challenge a dwelling house on the market for sale or rent. In the case of Bradley v HMRC [2013] UKFTT 131 (TC), strong indicators of quality and quantity of occupation were evident. She thoroughly moved in with all her own furniture; she even redecorated the property to her taste, and she was living fully in the property for eight months. However, the property was on the market, and this was the fatal blow to the PPR. The tribunal judge explained that as the property was on the market, there could not possibly have been the degree of permanence required for obtaining PPR. If somebody had offered her the asking price, the Tribunal felt sure that she would have sold it.
Intention to stay
Intention is the most important of the three. Neither quality nor quantity on their own, or even together, will suffice without intention. The intention is the ‘degree of permanence’ Millett J was referring to. The taxpayer’s plan is to remain in the property. Residence does not need to be forever, but it does need to be for the foreseeable future, without a ‘for sale’ or ‘to let’ sign outside.
K Lo v HMRC [2018] UKFTT 605 (TC) is a great example of lack of intention ruining a claim for PPR. K Lo was a foreign university student in London for the period of her degree. She had taken a ‘business loan’ from her mother to purchase a home in the UK. Although she didn’t live in this home full time, she had enough quality to justify PPR. She had also owned the property for the period of her university, so she had substantial quantity. The loan agreement, however, set out that the loan must be paid off after she finished university. With no other capital to pay off the loan except the house itself, K Lo was required (and would have known throughout her ownership that she would be required) to sell the house to pay off the loan. This requirement to sell the house was the equivalent of having the house on the market from day one and prevented PPR on the basis of K Lo having no intention to remain living in the house at the time she moved in.
Practical tip
Each case will be judged on the facts. Taxpayers should ensure that their intention on moving into a residence that they intend to claim PPR on has the required degree of permanence as well as quality and quantity. Evidence should be kept of all three of these crucial factors.
