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.

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.