Private Residence Relief – Is It A ‘Residence’?

Mark McLaughlin considers a fundamental requirement for capital gains tax private residence relief. 

Much has been written about capital gains tax (CGT) private residence relief (PRR), and for good reason - the relief has the potential to effectively exempt the entire gain by an individual on the disposal of his or her only or main residence. 

However, despite such an important and valuable relief, the PRR legislation is relatively brief (TCGA 1992, s 222-226B). Unfortunately, this is not necessarily a good thing. The relief provisions at s 222 (‘Relief on disposal of private residence’) state (at sub-s 1):

“This section applies to a gain accruing to an individual 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, or

(b) land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area”.

The lack of clarity in the PRR legislation can give rise to various problems, which have resulted in a number of tax cases on the relief. One such problem is that there is no statutory definition of ‘residence’ for these purposes. What makes a dwelling house a residence? The answer is not quite as straightforward as some might think. 

In Iles & Anor v Revenue & Customs [2014] UKFTT 436 (TC), the taxpayers occupied a flat for the last 25 days of their ownership of it (the flat was bought as an investment property on 30 April 1999, and sold on 25 July 2008). They claimed PRR on the disposal of the flat. HMRC considered that the taxpayers’ occupation did not amount to residence of the flat, and disallowed the relief. 

The First-tier Tribunal dismissed the taxpayers’ appeal. The tribunal found on the evidence that the taxpayers knew when moving into the flat that its sale was proceeding, and that their occupation of the flat would be temporary. It concluded that “…the quality of the appellants’ occupation of the flat did not have a sufficient degree of permanence, continuity or expectation of continuity to justify describing that occupation as ‘residence’.” The tribunal held that the taxpayers did not reside in the flat, within the meaning of the legislation.

The tribunal in Isles considered the earlier case Goodwin v Curtis CA 1998, 70 TC 478, which also looked at whether a property constituted a ‘residence’. 

In Goodwin, the taxpayer occupied a farmhouse for 32 days, moving into the property on 1 April 1985 and selling it on 3 May 1985. However, in March 1985 (i.e. before the taxpayer had completed the purchase of the farmhouse and moved in) he had given instructions to estate agents for the sale of the farmhouse, and advertisements were placed for its sale. The taxpayer completed the purchase of the farmhouse on 1 April 1985, and at the same time separated from his wife and took up residence at the farmhouse. On 3 April 1985, he completed the purchase of another property (Ayton). When the farmhouse was sold on 3 May 1985, the taxpayer moved into Ayton as he had nowhere else to live. The taxpayer unsuccessfully claimed PRR on the disposal of the farmhouse. 

The issue in Goodwin v Curtis was essentially whether the taxpayer’s occupation of the farmhouse amounted to ‘residence’. This was a question of fact and degree. The Court of Appeal dismissed the taxpayer’s appeal. The Court held that the taxpayer was in temporary occupation but not in residence. The taxpayer’s occupation was a “stop gap” measure pending completion of the purchase of somewhere else to live. The Court accepted a test derived from a non-tax case (Fox v Stirk and Bristol Electoral Registration Officer [1970] 2 QB 463), that a residence denotes “some degree of permanence, some degree of continuity or some expectation of continuity” (n.b. this test was also used in the Isles case above). The Court added: 

“Temporary occupation does not make a man resident there. The question whether the occupation is sufficient to make him resident is one of fact and degree for the commissioners to decide”. It added: “The substance of the commissioners’ finding taken as a whole, in my judgment, is that the nature, quality, length and circumstances of the taxpayer’s occupation of the farmhouse did not make his occupation qualify as residence.  This conclusion was, in my judgment, clearly open to them”.

The farmhouse in Goodwin had nine bedrooms; the Court observed that it was hardly suitable for a single man. Similarly, in Isles the flat was considered to be unsuited to the appellants’ wishes and needs (i.e. the flat had two bedrooms, for a family of five including two daughters and a son). Furthermore, the FTT in Isles concluded that the appellants knew at the time of moving into the flat that they would be moving out within five weeks. This presented an even more temporary picture than in Goodwin, where the taxpayer did not appear to know, on moving in, how short his occupation would be.

HMRC’s Capital Gains manual (at CG64420 and following) outlines its view on residence as a requisite for claiming PPR relief. HMRC notes that the word ‘residence’ is not defined in the legislation, and considers that the term in this context must be given its “ordinary meaning” as “the dwelling in which that person habitually lives; in other words, his or her home” (CG64427). 

Residence was defined in the following terms by Viscount Case L.C. in Levene v Inland Revenue Commissioners [1928] AC 217 (albeit in a different context), which was cited in Goodwin and is mentioned by HMRC (at CG64465): “... the word 'reside' is a familiar English word and is defined in the Oxford English Dictionary as meaning 'to dwell permanently or for a considerable time, to have one's settled or usual abode, to live in or at a particular place'.”     

HMRC regards the question of residence to be one of quality rather than quantity (CG64435). Thus, it appears that there is no ‘safe’ period of occupation for a property to qualify as an individual's residence. HMRC also cites the Goodwin case in support of its views on the meaning of residence. Whilst HMRC’s manuals do not generally carry the force of law, an awareness of HMRC's views may be helpful, such as in terms of preventing potential disputes.

In conclusion: