Property Tax ‘Own Goal’

Lee Sharpe looks at a tax case involving a claim to capital gains tax principal private residence relief, which proved highly embarrassing for HMRC.

This article looks at principal private residence (PPR) relief, also referred to as ‘only or main residence relief’, which usually affords a 100% ‘exemption’ from capital gains tax (CGT). We shall concentrate on one of the key problems for property owners – particularly those who own several properties at a time – which is proving that a property is in fact ‘a residence’ and thereby eligible for relief. We shall consider a handful of the more recent tax cases.

According to HMRC’s Capital Gains manual (at CG64427), the word is not defined for tax purposes, so takes its natural meaning. As such it is, in their words, ‘the dwelling in which that person habitually lives: in other words, his or her home’. Generally, there may be only one residence eligible for PPR at any time. But clearly a person, or a family, may own several residences concurrently, such as a family home and a holiday apartment. So it should instead be described as ‘a dwelling in which that person lives’.  

The legislation basically gives the taxpayer a power to nominate which residence is the exempt PPR at any particular time, when there is a combination of several residences available.

There have been numerous tax cases on PPR relief, and two themes are relevant here:

The case Ellis v HMRC [2013] UKFTT 775 (TC) (www.bailii.org/uk/cases/UKFTT/TC/2012/TC02426.html) arguably marks a new low in HMRC’s performance at tribunal, and a stunning failure on HMRC’s part to grasp a key aspect of PPR relief. Geraint Jones, Q.C. heard the case, who, as many readers will know, gained a certain celebrity for a sustained stance in appeals involving HMRC’s penalty regime. 

Mr and Mrs Ellis acquired a property in March 1999, and immediately let the property out until October 2004; they then occupied the property as a residence until April 2005, when it was sold for a gain of roughly £100,000. Crucially, Mr and Mrs Ellis wrote to HMRC in October 2004 to notify the tax office that they had elected for the property to be their main residence. Typically, HMRC accepted their letter, and then challenged the election only when the property was sold and the couple claimed PPR relief on their tax returns. 

HMRC’s challenge was effectively that, while they accepted that the property was a residence, it wasn’t the main residence because they had another residence which, in HMRC’s opinion, was their main residence, since the taxpayers spent more time at that other residence and looked after their grandchildren there.  

Unfortunately for HMRC, these points were all utterly irrelevant; the minute HMRC accepted that the property was in fact a residence. As Judge Jones explained, the legal power of the nomination as main residence overrides the extent and quality of occupation: once HMRC had allowed that the property was a residence and capable of being elected (so the nomination was valid), the property was the taxpayers’ PPR, no matter how infrequently they actually stayed there.

While the case scores highly for entertainment value, Mr and Mrs Ellis did appear to have quite a weak case – which HMRC seems to have missed completely. Bearing in mind that the taxpayers occupied the property for only six months, HMRC could easily have challenged whether or not they had a real expectation of a ‘degree of permanence’ about their occupation of the property such that it could be considered a residence. Given that it might be difficult for the taxpayers to demonstrate that their occupation was on a permanent basis once the property had been marketed for sale – and there were only six months between occupation and sale – HMRC might have made things much easier for themselves.

In Morgan v HMRC [2013] UKFTT 181 (TC), the taxpayer bought a flat in early 2001, with the intention of living there with his fiancée. However, by the time the property had completed, the engagement was over. The taxpayer nevertheless moved in, but within two weeks had given up hope of reconciling with his partner and moved out of the property in August, having arranged for it to be let out. Mr Morgan re-occupied the property in March 2006 and sold the flat in July. He claimed PPR relief, but was initially refused by HMRC, who did not believe that the actual occupation was of sufficient permanence to qualify as a residence. The tribunal disagreed, noting that his fiancée had been mentioned as an intended occupier as part of the mortgage arrangements, which showed a clear intent to take up residence as a couple, despite the fleeting initial occupation.

In Clarke v CRC [2011] UKFTT 619 (TC), the taxpayer moved out of the family home he had shared with his wife and daughters, and bought and then moved into a property in July 2002. The taxpayer then developed land next to that new property. In order to finance the development, he put the new property on the market in December of that year, and sold it three months later. When the development was finished in July 2003, he moved into the brand new property, where he stayed for two more years until he felt obliged to return to the family home to look after his children.

HMRC argued that Mr Clarke had never intended to live in either of the new properties on a permanent basis, with his short tenure at the first property an obvious factor, so neither of them could be a residence, or eligible for PPR relief. The tribunal was, however, satisfied that both properties were eligible.

In Bradley v HMRC [2013] UKFTT 131 (TC), the taxpayer left the matrimonial home for a property she also owned. Having re-decorated, etc., she put the property on the market. Eight months later, she and her husband were reconciled and she returned to the matrimonial home. While she argued that she had expected to live in the property indefinitely because of the stagnant property market, the tribunal found that the occupation was lacking in permanence, and denied relief.

In Moore v HMRC [2013] UKFTT 433 (TC), the taxpayer likewise moved into a new property after separating with his wife and lived there for about eight months. However, in correspondence with HMRC, he referred to his occupation as being temporary. The tribunal found that he was ineligible for PPR. 

All of these cases involved occupation of a few months, or even weeks. Documentary evidence seems to have helped Mr and Mrs Ellis, and Mr Morgan, but scuppered Mr Moore. It could be argued that a lack of evidence hindered Mrs Bradley. Clearly, these cases can turn on some fine details and it follows that evidence of one’s intentions at the time of occupation can subsequently prove enormously helpful, many years later.