Only or main residence relief (also referred to as principal private residence, or ‘PPR’ relief) is one of the most valuable tax reliefs available. As most readers will know, it effectively removes or reduces the gain when you sell your main (or only) home from a charge to capital gains tax. Millions of homeowners have claimed PPR relief without even realising it. But it is also frequently challenged by HMRC, with some disagreements ending up at the tribunal.
Below are one or two tax cases which my younger colleagues would probably refer to as ‘facepalm moments’. We all have them. We’d probably prefer not to make them in tax tribunal cases, where they will be recorded for posterity. Fortunately, we get to learn from other people’s mistakes.
Main residence nominations
My favourite such case remains Ellis v HMRC [2013] UKFTT 775 (TC), on the basis that HMRC managed to lose a relatively straight forward case with stunning ease.
Mr and Mrs Ellis occupied a property for a relatively short period of roughly six months up to sale, having previously let it for several years. They had another residence available to them, and spent a significant amount of time at that second property while living in the first one. They formally nominated the first property as their main residence, therefore eligible for PPR relief, as they were allowed to do (under TCGA 1992, s 222(5)). This legislation specifically allows the taxpayer to nominate which residence is their main residence, when there is more than one available at a given time.
Many readers will be aware that HMRC will challenge relatively short periods of occupation, on the basis that HMRC is not satisfied the property was actually a residence if occupation was only temporary. There are numerous cases on this point – and HMRC often wins. In this case, however, HMRC tried a different tack. HMRC first accepted the election as valid, and then tried to argue that, despite being a residence, it was not the Ellis’ main residence, so they could not have PPR relief.
Unfortunately for HMRC, the point of the legislation is to allow the taxpayer to nominate from a choice of residences. Assuming the nomination is valid, the legislation does not care which property is the most occupied or ‘used’ as a residence. As soon as HMRC said that it accepted the nomination, and that the first property was indeed a residence, HMRC was doomed to fail.
If HMRC had instead argued that the election was not valid in the first place, because the first property was not in fact a ‘residence’, HMRC might have had a better chance of success.
’Temporary’ residence
In Piers Moore v HMRC [2013] UKFTT 433 (TC), the taxpayer fared rather less well. The taxpayer moved out of the matrimonial home after his marriage broke down. He took furniture and clothes with him to the new property, and lived there for about eight months (although he marketed the new property for sale after roughly six months). Unfortunately, in correspondence with HMRC, he referred to his occupation as being ‘temporary’. HMRC seized on this to deny the taxpayer PPR relief, and the First-tier Tribunal found in favour of HMRC.
I have some sympathy for the taxpayer in this case. It seems his occupation of the property was substantively as a residence, except for the fact that he seems not to have intended to occupy it for very long. And yet, eight months’ occupation (or less) has been sufficient in other cases. If the taxpayer had not referred to his occupation of the property as being only temporary, I think he would have stood a much better chance of securing PPR relief. Of course, a taxpayer may perceive their occupation to be temporary, on the basis that they will ultimately move elsewhere. But a taxpayer might end up living somewhere ‘temporary’ for years, unable to sell a property and move on. Would that ‘temporary’ property never be eligible for PPR relief?
Many readers will be aware that the legislation deems the last 18 months of ownership of a PPR to be eligible for relief in almost any circumstances. This used to be 36 months, from a time when the housing market was particularly flat and homeowners were really struggling to sell. If a taxpayer ended up living in a ‘temporary’ property for that length of time, should they really be unable to consider that property their residence?
I cannot help but conclude that, if the taxpayer had not referred to his occupation as being temporary when corresponding with HMRC, then he would have stood a much better chance in his claim for PPR relief. Of course, HMRC might argue that the facts are what they are, and if the taxpayer really did not want to live there for long and had no expectation of continuity of occupation, then he should not be eligible for PPR relief.
Property trading?
While the previous case highlighted that one should be careful of how things are phrased when corresponding with HMRC, the case Hartland v HMRC [2014] UKFTT 1099 (TC) demonstrates that correspondence between the taxpayer and other parties is also important.
In that case, the taxpayer had bought, renovated and then sold on a series of four properties, claiming each as his PPR as he moved on. He also undertook other property developments at or around this time. His main activity was running his own plant hire business. HMRC seemingly decided that all of those four properties were actually part of a property trading activity, but then sought to tax only the three later properties as trading and not the taxpayer’s PPR.
As part of HMRC’s enquiries, the Inspector reviewed planning applications made by the taxpayer against those properties. She also reviewed his corresponding loan finance applications, where he gave his occupation as ‘builder’; he also stated that his income was far in excess of the amounts included in his tax return as trading profits from plant hire, which indicated to the Inspector that the taxpayer considered the returns on those property sales to be income, rather than capital gains. One of the properties was not actually occupied at all, because the taxpayer lived in a static caravan on site while it was demolished and rebuilt, and sold it almost immediately that the building work was complete.
In the end, the tribunal was prepared to accept that the first two properties were the taxpayer’s PPR when sold, but found that the other two properties were part of his property trade. I think that the taxpayer should take some comfort from the fact that two of the four properties were effectively cleared. Both HMRC and the First–tier Tribunal remarked on the information provided in the taxpayer’s loan applications, and I don’t think it helped his case.
Practical Tip:
Only or main residence relief is valuable, so it is understandable that some claims will be challenged by HMRC and ultimately tested in the tax tribunals. The last two cases show that contemporaneous evidence can prove important several years later, if HMRC decides to open an enquiry. The last case also shows that HMRC is more than happy to access and review third party evidence as part of its enquiries. Readers should of course bear this in mind, when corresponding with HMRC or indeed with other parties.
