Posted by barriewright - August 18, 2021 9:52 am Principal Private Residence

As I am sure most of us know, an individual is exempt from capital gains tax on all or part of a gain on the disposal of his only or main residence. The exemption applies to the disposal of, or of an interest in:

• A dwelling house or part of a dwelling house which is, or has at any time in the period of ownership been, his only or main residence, or
• Land which he has for his own occupation and enjoyment with that residence as its garden or grounds.

In certain circumstances trustees may claim exemption for the only or main residence of a beneficiary under a settlement.

The exemption may also apply to separate buildings in the grounds of the dwelling house such as a bungalow built on the land as a residence for the caretaker of the house and his wife physically separate from the main house. On its ultimate sale it was held that the gain on the bungalow was tax free as in its ordinary usage, the word “dwelling house” or “residence” could comprise several buildings not physically joined together and a staff flat with its own access could accurately be described as part of a larger house.

When will you be covered by PRR?

We are often asked the question “how long do I need to live in a residential property for it to become my private residence and therefore be covered by private residence relief.” (PPR), when I sell.

The answer being “ there is no specified time period.”

The test of residence is one of quality rather than quantity of occupation. A dwelling house must have become its owners’ home, with every case decided by its own facts.

Examples:

A recent tax case considered the concept of “quality of residence,” when Mr S who divorced in 1997, sold his former matrimonial home in November 1998 and began staying with his brother. In November 1999 he purchased a house which was in very poor condition. He began renovating it and in July 2000 he let it to students. It was sold in 2005. Mr S claimed that the property was his PPR between November 1999 and July 2000, when he began living with a widow. However, HMRC challenged his claim and found that electricity bills had been minimal, there had been no cooking facilities and the gas had been switched off until March 2000, with the result that there was no hot water available for washing. To the extent that Mr S had occupied the house, “he did so for the purpose of renovating the property rather than occupying it as his home which he expected to occupy with some degree of continuity”.

HMRC also successfully challenged the availability of PPR in the case of Mr M where the taxpayer said he lived in one of his buy to let properties following the separation from his wife. However it was proven that he had actually moved in with his new wife and there was insufficient quality and quantity of occupation for the property disposed of to have ever become his main residence.

HMRC are increasing their enquiries

HMRC are increasingly opening enquiries into tax returns where residential property disposals have been omitted on the basis that the gain is fully covered by private residence relief, with information being obtained from the Land Registry.

Mr and Mrs C bought a property called Green Lane in March 2013. At the time they were living in rented accommodation in the same town. They did not move into Green Lane upon purchasing it, as they wished to extend and refurbish. Mr C, a builder, carried out this building work himself.

The rental property was conveniently located for Mr C because his company was involved in a building project in the next door house.

During the course of the refurbishment work on Green Lane, Mr and Mrs C fell out with the next door neighbours. This escalated, with police and the council involved.

Consequently in June 2014 Mr and Mrs C sold Green Lane to an individual living locally who made an unsolicited offer to buy the property and kept increasing his offer until they eventually accepted.

HMRC argued that the buyers offer was accepted around December 2013, when Mr and Mrs C had extended the lease on the rental property to the end of June 2014, and so by the time Mr and Mrs C moved into Green Lane in the spring of 2014, they had already agreed to sell Green Lane. It appears that Mr and Mrs C only occupied the property for 6 to 8 weeks.

Occupation v residency

Whether “occupation” amounts to “residence”, is a question of fact and degree and this was to be determined at Tribunal. Mr and Mrs C had to provide evidence that their residence in the property showed some degree of permanence, some degree of continuity or some expectation of continuity.

The Tribunal accepted the arguments that they intended to occupy the property long term, but accepted an offer they could not refuse. The appeal against the capital gains tax assessment and careless inaccuracy penalty was allowed.

If you are considering selling your main residence or any part of it, or looking to purchase or build  your main residence I advise that you refer to your resident partner or manager for advice.