Private Residence Relief Denied – A Oliver

The tax law surrounding the sale of residences and Private Residence Relief continues to cause disputes between taxpayers and HMRC.  With the disparity between capital gains tax rates on most assets and the higher rate now applicable to sales of residential property, this is only likely to continue.

In a recent case at the First-Tier Tribunal (A Oliver, TC5521), the taxpayer purchased a flat in January 2007 and then sold it in April 2007.  He claimed he purchased it following a trial separation from his partner (which was recommended by their counselling sessions).  However, the flat had a relatively short time remaining on its lease which made it difficult to sell.  Mr Oliver asked the vendor to begin the process to extend the lease before exchange of contracts; otherwise he would have had to wait two years before he could make the application following completion.

The extension of the lease resulted in a substantial increase to the flat’s value, and HMRC argued that Private Residence Relief (PRR) should not apply, on the basis that he had been ‘engaging in adventure in the nature of a trade’.  The rules state at TCGA 1992, Section 224(3) that PRR should not apply where a property is acquired with “the purposes of realising a gain from the disposal of it”.

Interestingly, the Tribunal agreed that Mr Oliverʼs actions did not amount to a venture in the nature of a trade and that he did not have an intention to sell the flat when he first acquired it.  However, they instead considered whether the taxpayer’s presence in the flat was sufficient for it to qualify as his main residence.  They found that there were inconsistencies in his evidence and ultimately concluded that the quality of occupation lacked any degree of permanence or expectation of continuity.

Mr Oliver’s appeal was therefore dismissed.  Had Mr Oliver made a more convincing witness, and perhaps been able to demonstrate his intent to reside in the property more permanently he may have succeeded.  In cases such as this, taking advice in advance would help to avoid problems arising later.  We would be delighted to hear from you if you or your clients might be caught by these rules.

No Private Residence Relief on Uncultivated, Separate Land – Fountain & Anor v HMRC

Private Residence Relief (PRR) is a very useful relief for taxpayers and prevents Capital Gains Tax from being paid on the sale of a primary residence in most cases.  There are aspects of the rules which can be complex and these continue to cause difficulties for some taxpayers.

In a recent First-tier Tribunal case, Fountain & Anor v HMRC, the Tribunal found that the taxpayers in question were not entitled to claim PRR relief in respect of their disposal of a building plot, which they had argued was part of the grounds of the house.

The taxpayers owned an area of land behind their home which had previously been used in their haulage business. The business was closed and subsequently part of the property was divided into five building plots. Most of the plots were sold or gifted in 2006 and a new home was built on one of the plots for the Fountains, who moved in in January 2007. Their previous residence was then sold in February 2007 together with a field. The last plot (named ‘Plot 2’) was sold later, in December 2009 and led to the Tribunal case.

The taxpayers argued that Plot 2 formed part of the garden or grounds of their new residence on the basis that they were on the same title deed and the plot had formed part of the garden of their original home and continued to be used for their domestic use and enjoyment.

The Tribunal agreed that Plot 2 had indeed formed part of the grounds of their original home, however they did not believe this was relevant to the disposal in question. They also found that being on the same title was irrelevant.

The Tribunal found that Plot 2 was uncultivated and was physically separated from their new house by a separate plot which had a further house built on it and had been fenced off. They did not believe that Plot 2 has ever formed part of the garden or grounds of the new house.  No private residence relief was due and the appeal was therefore dismissed.

When dealing with PRR claims, it is important to thoroughly analyse the facts of the specific case and take previous case law into account.  Such planning at the time could help to prevent a nasty surprise in the future.  Eaves and Co would be delighted to assist if you have any queries on disposing of your home and the tax implications.

Negligence, Private Residence Relief and Penalties

In the recent case of J Day & A Dalgety, two taxpayers had sold three properties that they owned together. The case concerned negligence and penalties for carelessness, as they did not include any details of capital gains relating to the property sales on their returns.  They argued that this was because the gains were below the annual exemption and therefore did not realise that they needed to be included.

One of the taxpayers also claimed that one of the houses sold was their only or main residence and that Private Residence Relief (PRR) should have been available.

HMRC raised discovery assessments and levied penalties for carelessness on both taxpayers, which they appealed.

The First-tier Tribunal agreed that the taxpayers had been careless in not including details on the returns.  The taxpayers made a number of errors in their calculations, including attempting to deduct mortgage fees, claiming they were deductible under TCGA 1992, s 38(1)(c).  However, the tribunal found that such costs were not included in the list of “incidental costs” in s 38(2) and were therefore not allowable.

In terms of the PRR claim, the tribunal found that the first taxpayer had not lived in the property with any degree of permanence or continuity as required by the relevant case law (Goodwin v Curtis [1998] STC 475).  No notice had been given to HMRC or to his employers that he had moved house and no invoices were addressed to him at the property.

The Tribunal dismissed the taxpayers’ appeals, agreeing with HMRC that both taxpayers had been negligent in preparing their tax returns by not including details of the property disposals.

It is important to ensure that proper care is taken with filing self-assessment tax returns and all relevant sources of income or gains are included where required in order to mitigate the risk of penalties.    Eaves and Co would be happy to assist if you or your clients have any concerns.

Private Residence Relief (PRR) – 25 Days Not Permanent

Private Residence Relief (PRR), formerly known as Principle Private Residence Relief (PPR) can often be a cause for contention between taxpayers and HMRC and this was proven again in the recent case of Dr S Iles and Dr D Kaltsas v HMRC (TC03565).

The outcome of the case is unlikely to be a shock to most practitioners who are familiar with the PRR rules; however it does show the disparity between what taxpayers/clients might expect.

Facts

The taxpayers in the case owned an investment flat which they had acquired in 1999 and let until they decided to sell the property in 2007.

Contracts were exchanged on 9 July 2008 with the sale completing on 25 July 2008. Having also sold their main residence, the taxpayers moved into the flat in question on 1 July 2008.

They were therefore present in the flat for 25 days and sought to claim PPR relief on the basis that it was their only residence during that period, and therefore eligible for exemption for the final 36 months of ownership.

HMRC argued that the 25 day period of occupation was not enough to demonstrate that they intended to reside there, particularly as the flat was for sale and an offer had been accepted.

Decision

The tribunal agreed that the temporary nature of the occupation did not amount to “residence” for the purposes of the legislation; the taxpayers did not feel the property met their needs, had already found a suitable alternative and had already agreed to sell the property before moving in. The taxpayers’ appeal was therefore dismissed.

This case appears to be fairly straightforward as the occupation was so obviously temporary. Problems can arise in determining where to draw the line as to what constitutes permanent residence and it is therefore always worth seeking professional advice.

Intention of Parties Relevant – Private Residence Relief (A Dickinson -TC3037)

The case of A Dickinson involved private residence relief and rested on when the character of land ceases to be that of garden and grounds where there is development planned.

Background

The taxpayer owned a house with large garden and grounds, including a tennis court.  In 1989 part of the taxpayer’s garden and tennis court were included in a developer’s approved planning permission application.   The taxpayer had continued to automatically renew the planning permission every three years.

Sometime in 2006 the taxpayer learned that she was no longer going to be able to automatically renew the planning permission.  She therefore decided that rather than sell the land direct to a developer she would  design and build the houses herself. So, with her husband and two friends she formed a company, “Ilex Developments Limited” to manage the project.

On 14 December 2006, Ilex “agreed”, subject to contract, to buy the land. Solicitors were instructed by each party.

The taxpayer said that at this stage she assumed (erroneously) that contracts had been exchanged, and Ilex was given permission to start work on the groundwork for the development, which it did on 7th June 2007.

There were in fact some teething issues with the highways agency and contracts were not actually exchanged until 27 July 2007.

Mrs. Dickinson’s 2007-08 tax return was submitted but did not disclose the land sale on the basis that Private Residence Relief was applicable under s.222 TCGA 1992, as the land formed the garden and grounds of her private residence.

HMRC’s Position

An enquiry into the return was subsequently raised.

HMRC refused the claim on the basis the land was already under development when the contracts were exchanged.  They argued that it had to be available to the owner as “garden or grounds” on the date it was sold for relief to be granted.

As a result they raised an assessment to tax of £48,314.20 plus interest.

First-tier Tribunal’s Decision

They concluded that the commencement of ground works by Ilex did not constitute a “material start”,  thus permanently changing the legal status or character of the land.

This was because without an unconditional exchange of contracts, or some other form of legally binding pre-contract, permitting entry onto and development of the land, it cannot have been the parties’ intention.

For land to lose its character as “garden or grounds”, the change must be permanent or regarded as permanent.  The change cannot be transient or conditional.

Ilex was allowed onto the land disposed of to start foundation work on an informal basis.  There was no agreement allowing Ilex access onto the land to carry out the works.  At any stage prior to formal exchange of contracts, if for example the access problem had proven to be insurmountable, either party was at liberty to “walk away” from the transaction.

If the transaction had not progressed to completion it could not be suggested that the land had temporarily ceased to be “garden or grounds”, only to have reverted to its original status on the transaction becoming abortive.

They concluded that when Ilex entered onto the land and started the works it did not constitute a disposal of the land.  The land therefore retained its character as “garden or grounds” within the meaning of s 222(1)(b) until the time of its disposal on 27 July 2007 when contracts were exchanged.

The disposal of the land therefore attracts principal private residence relief and the taxpayer’s appeal was allowed.

Private Residence Relief Denied – Dream House but not the same Dwelling House

Background

In this recent case, the taxpayer Paul Gibson purchased a property called Moles House for £715,000. Mr Gibson decided to demolish the original house (referred to by HMRC as Moles House One) so as to build his dream family house in its place for him and his partner (referred to as Moles House Two.) Demolition and complete reconstruction of the house was deemed as more cost effective than renovating and extending the existing structure.

Following financial difficulties due to the expense of the project and relationship problems, it was decided that the ‘new house’ would be sold upon completion. When the house was sold in February 2006 for approximately £1.5million, the capital gain on the sale of the property was not reported in Mr Gibson’s 2006/07 tax return assuming Private Residence Relief was due under TCGA s.222. HMRC opened an enquiry into that return and issued a closure notice that brought the capital gain on the house into charge as well as subsequent penalties. Mr Gibson appealed against the rejection of PPR and the 50% penalty imposed.

First-tier Tribunal Decisions

The main points considered for whether Private Residence Relief was due in this case were:

1.)     Did Moles House Two constitute the same ‘dwelling house’ as Moles House One according to its ordinary meaning under TCGA s.222(1)?

  • The FTT noted that if an existing dwelling house was fundamentally remodelled and renovated it would still be classified as the same dwelling house.  They considered whether a house that was demolished and reconstructed in order to achieve the same end as remodelling the existing house by a more cost effective means should also be regarded as the same dwelling house.
  • However, the Tribunal Judge ruled that the words of ‘dwelling house’ need to be given their ordinary meaning. ‘Dwelling house’ refers to the building itself rather than to the land. If one house is completely demolished and a new house is built in its place, then the new house is not the same ‘dwelling house.’
  • Mr Gibson’s case was weakened by the fact that the two houses were built out of different materials and it was not built on the same foundations; it wasn’t considered as the same house physically.  Perhaps the outcome would have been different if the materials from Moles House One were recycled and used to build Moles House Two in the same plan as before?  His case was also weakened by his own reference to Moles House Two as the ‘new house’ in his testimony.

On the grounds of the meaning of ‘dwelling house’, Moles House Two was found to be a different dwelling and Mr Gibson would not to be entitled to Private Residence Relief unless he had resided in the new dwelling. 

2.)     Was Moles House One and subsequently Moles House Two the individual’s only or main residence throughout the period of ownership?

  • HMRC argued that a dwelling house must be physically occupied by the individual during their period of ownership for it to be their only or main residence and for relief to apply. The intention to occupy a dwelling house but having to sell it for unforeseen reasons does not qualify the individual for relief.
  • It was accepted by all parties that Moles House One had been Mr Gibson’s main and permanent residence.
  • It was only revealed during the course of the court proceedings that he had ‘lived’ in Moles House Two following its completion. However, Mr Gibson had only ‘camped’ at Moles House Two during the process of the sale and had not occupied the reconstructed property at any other time prior to his decision to sell it. He had also testified that permanent residence in the property was not possible before the construction of Moles House Two was complete.
  • Occupation of a property does not equate to residence unless it becomes a person’s home.

As the newly constructed house was not considered as the principal residence of Mr Gibson, the claim for PPR was rejected on this point too.

Despite Mr Gibson’s appeal being rejected in its entirety, if a couple of circumstances had differed slightly in this case then the outcome may have been different.  The intricate facts of each case are vitally important and taking advice before undertaking transactions can allow the position to be considered and, perhaps corrected, in advance.

Principal Private Residence: The Importance of Intention

D Morgan (TC2596)

The first-tier tribunal case dealt with the taxpayer’s claim for principal private residence relief (PPR). The area of contention was whether the taxpayer’s occupation of the property was sufficient to justify its description as his residence for PPR purposes.

The key message from the outcome of this case is that, according to the tribunal, it is a taxpayer’s intention, and not the quality of the occupation, that is more important in determing whether the relief applies.

Background

The taxpayer purchased the property with the intention of moving into it with his fiancée, and making it their marital home. However, shortly before completion his fiancée broke off the engagement suddenly, giving no explanation.

The taxpayer, on the lack of evidence to the contrary, felt that his fiancée was merely having cold feet. He assumed that they would soon reconcile and she would move into his new house with him. He therefore went ahead with the property purchase and moved in.

Some weeks later it became apparent that they were not going to reconcile as she was seeing someone else. The taxpayer, whilst purchasing the property in his own name, had budgeted on his fiancée paying for groceries and household bills etc. As a result this left him in financial trouble and he had to assess his options.

After living in the property 3 months the taxpayer moved back in with his parents and rented the property out. The property was rented out for just under 5 years, at which point the taxpayer moved back in with the intention of selling the property. The property was then sold within 4 months.

HMRC assessed the taxpayer to capital gains tax on the gain, saying that the two periods he had stayed in the property had been temporary and it therefore did not qualify for principal private residence relief.

The taxpayer appealed.

Ruling

The tribunal said the case was “extremely finely balanced”. It was their view that it is not the ‘quality’ of the occupation, but the intention of the occupier that matters when determining whether or not the property is an individual’s principal private residence.

If Mr Morgan had moved into the property fully furnished, and all the bills had been addressed to him personally, and if he had already intended to let the property, then the quality of his occupation would be irrelevant.

The tribunal accepted the taxpayer’s assertion that he had hoped, when he occupied the house, that his fiancée might return. Therefore when purchasing the property he had intended for it to become his principal private residence.

After learning his fiancée would not be returning, an early repayment charge clause in the mortgage made it clear it would have been financially unviable to sell the property straightaway. Therefore the tribunal said that it was understandable that, after he found the cost of living too high, the taxpayer decided to let the property and move back in with his parents.

The taxpayer’s appeal was allowed and he was entitled to principal private residence relief.

Principal Private Residence Relief – TC02560 Mrs Bradley

The recent tribunal case of Mrs Bradley v HMRC was regarding principal private residence relief, and in particular whether the appellant had ever ‘resided’ in the property in question.

Mrs Bradley had moved into a property which she had previously rented out after separating from her husband. After living in the property for less than a year the property was then sold and Mrs Bradley reconciled with her husband.

Prior to Mrs Bradley moving in to the property it was put on the market for sale and remained so when she moved in.  The tribunal were happy that the couple had intended to permanently separate but questioned whether she ‘resided’ there.

In line with Goodwin v Curtis the tribunal stated that in order to qualify for principal private residence relief a taxpayer must provide evidence that their occupation shows some degree of permanence, some degree of continuity or some expectation of continuity.

On the basis that the property was for sale throughout, the tribunal concluded that the residence was not intended to be permanent; had Mrs Bradley received a suitable offer for the property she would have sold sooner. The property could only ever have been a temporary home in those circumstances, and therefore it was never her residence.

The claim for principal private residence relief was denied.

Private residence relief – Daniel Regan v HMRC (TC02247) (PRR/PPR)

A private residence relief (PRR/PPR) case was recently heard by the first-tier tax tribunal.  The appellant, Mr Regan bought a house at the back of a club which was owned by a family company which he managed. The entertainment manager of the club also lived at the house.

In Christmas 1996, Mr Regan moved out of the property temporarily so that the entertainment manager’s wife’s family could stay.

At this time, Mr Regan and his new girlfriend (who later became his wife) spent most of their time at her flat.  Despite this, most of his belongings had remained at the house behind the club, which he also continued to use as his main postal address.

In 1998, Mr Regan and his girlfriend purchased a new house together and his parents purchased the house behind the club from him in 2000.

HMRC argued that private residence relief (PRR) was not available as Mr Regan had not been able to demonstrate sufficient permanence in his occupation of the property.  The tribunal found in favour of Mr Regan, stating that his occupation of his girlfriend’s flat did not have the required “settled quality” to detract from his occupation of the house. As he had moved out within 36 months of the sale of the property to his parents, relief was available.

Recent Tribunal Case re Principal Private Residence Relief (PPR) – MJ and BA Harte (TC1951)

In a recent tribunal case (MJ and BA Harte (TC1951)), a gentleman inherited a house from his father in 1992.  In May 2007 he transferred a half share in the property to his wife, and in October of the same year the property was sold.

The couple claimed Principal Private Residence relief (PPR) on the property sale even though they had another home during this period.  Their claim was based on the fact that they had intended to make the inherited property their home, but had only ever spent brief spells there.

The Tribunal found that their spells in the house did not add up to occupation, and it could not have been their home because they did not transfer any possessions.

Furthermore the appellants did not permanently vacate their original residence, so their original home remained their principal private residence.  A married couple can only have one PPR at any one time.

The claim for PPR was therefore denied.