Lee Sharpe provides a summary of some recent notable tax cases in connection with property.
This article covers some of the more notable legal cases in connection with property that have arisen over the last year or so.
Principal private residence relief from brief occupation
Many property investors will be familiar with principal private residence (PPR) relief, (also referred to as ‘only or main residence relief’), which protects homeowners from paying tax on capital gains arising on the disposal of their main home. The relief is apportioned according to whether or not (and/or to the extent that) the property is occupied as their main residence, during the period of ownership for capital gains tax (CGT) purposes, although there are allowances for periods away from home, delays in taking up occupation, etc.
The relief is potentially very valuable, and property investors can and do make use of it in their investment planning, but the key is that the property must at some point have been the taxpayer’s ‘residence’, which generally assumes some permanence, some degree or expectation of continuity of occupation.
Brief period of occupation was sufficient
In Dutton-Forshaw v HMRC [2015] UKFTT 0478 (TC), the taxpayer lived at a London flat for roughly seven weeks; HMRC argued that he was ineligible for PPR relief because he had an ‘itinerant’ lifestyle and had not demonstrated an intention to live at the flat on a permanent or continuous basis.
Notably, however:
- he had applied for a parking permit at the property;
- he had notified his local authority for council tax purposes; and
- he had no other ‘home’.
The tribunal was satisfied, on the facts, that although physical occupation was short-lived, and the taxpayer was aware that circumstances might arise that would require him to live elsewhere, the taxpayer had nevertheless hoped to live at the property on a continuous basis, and the fact that his resulting occupation was nevertheless brief was for reasons beyond his control. He was held to be eligible for PPR relief on the property.
The case also refers to a previous similar case – Morgan v HMRC [2013] UKFTT 181 – a personal favourite; see also Clarke v CRC [2011] UKFTT 619 (TC) for further reading.
Own home or property development?
The capital gains legislation excludes PPR relief where the taxpayer’s purpose is to realise a capital gain on a property. Even HMRC admits this is nonsense, because nobody spends money on a property hoping it will be worth less when they come to sell. In HMRC’s Capital Gains manual (at CG65210), it states:
‘The subsection should only be taken to apply when the primary purpose of the acquisition, or of the expenditure, was an early disposal at a profit.’
Where such purpose exists, HMRC is in fact likely to prefer the argument that the taxpayer is actually trading (as per CG6523).
In Hartland v Revenue and Customs [2014] UKFTT 1099 (TC), the taxpayer bought, substantially renovated and sold on a series of properties between 1996 and 2004, but did not declare any profits or capital gains on the basis that he thought he was eligible for PPR relief, as they were consecutively his ‘homes’, and that his approach was typical of someone simply moving up the property ladder.
HMRC argued that the gains on disposal were in fact trading profits, and should be taxed (and subject to National Insurance contributions as appropriate). The case focused on two cottages: Primrose Cottage, which the taxpayer sold in July 2002, and Grey Cottage, sold in February 2004.
The tribunal noted, amongst other things, that there was no evidence that the taxpayer had actually occupied Grey Cottage (it was offered for sale as a vacant new build) and that the taxpayer had referred to himself as a builder in his mortgage applications – claiming profits well in excess of those he had returned to HMRC for tax purposes. The property was sold almost as soon as the building work had been finished. In the context of the taxpayer’s history of buying, renovating and selling property, the tribunal concluded that the proceeds from Grey Cottage were taxable as trading profits.
But with Primrose Cottage, and despite that property also having been sold soon after building work had finished, the tribunal noted:
- the taxpayer had updated his correspondence address to that property;
- he had paid council tax as its occupant, along with utilities, building and contents insurance; and
- there was photographic evidence of the taxpayer’s furniture in the property.
Having satisfied itself that Primrose Cottage was in fact the taxpayer’s residence, the tribunal rejected HMRC’s contention that the proceeds on that property were taxable as a trading receipt.
Therefore, the taxpayer won on one property, and lost on the other.
Reclaiming VAT on the construction of a new dwelling
Whilst many property investors and developers know that there is no VAT on new houses, this is strictly incorrect: there is VAT but it is chargeable at 0%. This apparently fine distinction makes a world of difference, because being able to ‘charge’ zero-rated VAT on sale effectively allows the developer to register for VAT, and to reclaim the lion’s share of the VAT he incurs on the development of the property. It therefore follows that whether or not a dwelling qualifies as ‘new’ will be hotly contested.
In J3 Building Solutions Ltd v HMRC [2016] UKFTT 0318 (TC), the taxpayer demolished an old coach house, with several modern extensions, that had been used as a dwelling. Parts of the old coach house walls were retained when the new building was constructed and HMRC denied the company’s VAT claim on the basis that this was not a new dwelling but effectively a reconstruction of the old dwelling.
HMRC’s VAT Notice 708 ‘Buildings and Construction’ says that a building qualifies if:
‘It is built from scratch, and, before construction starts, any pre-existing building is demolished completely to ground level (cellars, basements and the ‘slab’ at ground level may be retained)...‘
HMRC’s guidance does include some fairly specific scenarios where part of the old structure may be retained in a new building and still qualify, but in this case HMRC felt that too much of the old building had been kept.
The case is long but is useful and interesting because:
- it is always entertaining to see a tribunal admonish HMRC’s presentation!
- it has a useful analysis of related cases, despite professing not to do so;
- it indicated that a qualifying ‘new build’ does not necessarily have to be an entirely new structure; and
- it considers whether or not HMRC is right effectively to assert that any previous building must basically cease to exist, otherwise any new building is simply an alteration to that previous building and cannot be eligible.
In this case, the tribunal was happy to find that, despite parts of the previous building having been kept, the new construction did qualify as a new dwelling, and the taxpayer company was therefore eligible to reclaim the VAT on (most of) its construction costs.
Note that the case refers extensively to HMRC v Astral Construction Ltd [2015] UKUT 21 (TCC), which HMRC also lost and which also carries greater weight as it is an Upper Tribunal case.
