Jennifer Adams looks at the meaning of ‘only or main residence’, which is a fundamental condition for claiming capital gains tax principal private residence relief.
The most useful and complete relief from capital gains tax (CGT) on any gain made on the sale or gift of a property relates to the individual’s ‘only or main residence’ (note: the legislation does not refer to ‘principal private residence’). Even though it is usual to think that such a designation will allow the gain to be automatically fully CGT-free, there are in fact two main conditions that need to be satisfied, the second being the primary exempting condition:
- the property must not have been purchased for the sole reason of making a profit (TCGA 1992, s 224(3)); and
- the residence (termed ‘dwelling-house’ in the legislation) must be an individual's ‘only or main residence’ throughout the period of ownership (TCGA 1992, s 222(1)).
Meaning of the phrase ‘only or main residence’ – case law
This phrase is not defined in TCGA 1992, and therefore to ascertain its full meaning we need to look at points that have made in cases when principal private residence (PPR) relief claims have been brought to court. Considering the comments made can be of assistance when determining whether a claim for this valuable relief has a chance of succeeding. Just because someone lives in a property (even if that property is their only property), it does not necessarily mean that the property is their ‘only or main residence’ for tax purposes.
A degree of permanence (or intention to achieve permanence) is required for a claim to succeed, and this is an area that has been the subject of a number of court cases. HMRC’s stance has always been that residency in a PPR claim is determined on the basis of quality rather than length of occupation, such that ‘even occasional and short residence can make a residence but the question is one of fact and degree’ (see HMRC’s Capital Gains manual at paragraph 64435.
Moore v Thompson ([1986] 61 TC 15)
This case is a reminder that occupation by itself is not sufficient to make a house a home. The taxpayer moved into the house before it was marketed for sale and lived in it for seven to eight months. The tribunal decided against the taxpayer; although accepting that he had lived in the property, they felt that the lack of actual evidence of occupation suggested that he had not intended to live in the property permanently.
Goodwin v Curtis ([1998] STC 475)
In this case, the taxpayer had lived in a farmhouse for 32 days, but because the property was offered for sale before occupancy began and then sold when the taxpayer moved to another address, it was held that the taxpayer’s occupancy was not residence because there was no evidence of ‘permanence, continuity or expectation of continuity’.
Moore v HMRC ([2013] UKFTT 433 (TC))
In this case, a relatively short period of occupancy was again in question. Evidence was submitted which the judge said proved occupancy, but HMRC's case was again that the occupation did not have the necessary degree of ‘permanence, continuity or expectation of continuity’ necessary for the claim to succeed. The taxpayer remained in the property after his marriage had broken up and for some months before it was marketed. Indeed, the purchase of a new property with his new family was initiated six months after he had moved in. Even so, the tribunal found the property to be of temporary accommodation and not a permanent residence.
Bradley v HMRC ([2013] UKFTT 131 (TC))
In this case, the length of time living in the property was similar to the Moore v Thomson case (i.e. eight months). The taxpayer had placed the property on the market then withdrew, unable to sell because of market conditions. She then intended to make it her main home, and made improvements with the expectation of living there permanently. The property was subsequently sold and the tribunal found that her occupation was only temporary, it was never her main residence, and was not intended to be so.
Looking at the more recent cases, HMRC do not appear to like situations where a property is being renovated before sale and as such can only be lived in for a short period. They particularly do not like it if two properties are owned at the same time before one is sold.
Take this case as an example:
Springthorpe v Revenue & Customs ([2010] UKFTT 582 (TC)).The taxpayer failed in his claim for a period in which he was supposedly living in a property during renovation. The period in question was during the winter months when the property had no gas supply, so there was no hot water or cooking facilities. In addition, he claimed a council tax exemption, and his correspondence was sent to another address.
What can be done to prove ‘permanence’?
The importance of corroborative evidence of intention to occupy permanently for a significant period is paramount. Ticking all the boxes on a list of evidence will help (e.g. council tax being paid at the full rate; HMRC, the bank and others having been notified of the change of address; utilities being connected with realistic levels of consumption). Financing methods are also important. Financing a property intended to provide accommodation by bank overdraft or other short-term funding whilst a relationship is in difficulties is not an indicator of ‘permanence, continuity or expectation of continuity’.
Length of stay can help – the longer the better. There is the need to show that the move into the property in question is a lifestyle choice and not just a temporary one. HMRC may (for example) look at ‘Rightmove’ if seeking to challenge a PPR relief claim.
Practical Tip:
HMRC guidance is included in its Capital Gains manual at CG64200 and following. In the HMRC ‘Capital Gains Tax for Land and Buildings Toolkit’, the relevant text is to be found at sections 13–21 but remember, both the manual and toolkit are HMRC’s stance, and is not legally binding.
