To the Battlements!

Here is a Tax Exempt Castle

castle

“That’s not a Castle!  It’s a cardboard cut-out!”

All together now;

“Oh No It Isn’t!”

“Oh Yes It Is!”

As the Pantomime Season approaches there may be a lot of it about?  By this, I do not mean the standard of scenery in the local production of Robin Hood, but the naïve way many people seem to view the “exemption” due under what strictly is private residence relief S222 TCGA 1992.  It is a relief because the rules apply to give a deduction against real chargeable assets.  The need to do a computation of a gain applies invariably.  The quantum of tax is subject to the amount of relief.  Admittedly, in many circumstances, this relief may amount to 100% of the gain, but that is by no means all circumstances.

There are (no doubt) many parents eagerly awaiting the return of their beloved offspring from University for Christmas.  They may even have helped purchase accommodation for them away from the family home.  How many are hoping any gain on such property will slip through, as a gain the particular child is “entitled to” on their “own home”?

Might they be correct in such interpretation?

Well, it depends ~ to use a famous technical phrase.

The recent case of K Lo demonstrates this.  In this case the taxpayer claimed private residence relief on a flat but this was rejected by the Tribunal.  They found it was for the taxpayer to show she was entitled to it, not HMRC to disprove her claim.  They found her story regarding her long term intentions for it to be her main home did not quite ring true.  Although they accepted the taxpayer stayed in the accommodation at weekends and during University vacations, they did not accept the “quality of residence” was sufficient to make it her main residence.  This “quality of residence” point was based on the Tribunal’s view of the facts, perhaps with an implication the taxpayer and her boyfriend would have done more (in the few months she owned the property) to clean up what was plainly a run-down, badly maintained house, full of rubbish hoarded by the previous elderly tenant, if they had truly intended to make it their first home.

The fact that she was not on the electoral roll at this address was another factor against the property being treated as her residence.  Thus, the Courts found not only was she chargeable to CGT with no private residence relief but also exposed to penalties because she had been negligent in not making proper disclosure and not taking professional advice to understand the areas of possible doubt.

The result equals one unhappy taxpayer, I imagine.

Interestingly, if she had taken professional advice, it may have been perfectly possible legally to make an appropriate election and thus eliminate both the capital gains tax and also the associated penalty.

Another Tax Tribunal noted recently (in George Edwards Consulting Ltd) it was ironic that by trying to save costs by not seeking professional advice, this inaction cost the taxpayer 3 times as much in penalties!

The penalty regime is now raising significant money for Government.  Getting professional advice to get things rights is a prudent protection.

An Englishman’s Home is his Castle?

Or is HMRC undermining it?

CardiffCastle-Exterior41-med-A0013928-1

  1. “Everyone” knows a capital gain on your own residence is “tax exempt”.

 

  1. “Everyone” knows offshore gains are “tax exempt”.  Isn’t this in the Press on a regular basis?

 

Hence, people with “circumstances” which in reality encompass an awful lot of the nation, may actually discover that they need professional advice, because what they thought was tax exempt is not – in reality.

 

Things which may affect the above “tax exempt” analysis potentially include:-

 

a).   Being UK tax resident.

 

b).  Not being UK tax resident, but having property here.

 

(That just about covers everyone!)

 

Crucially, Private Residence Relief is a relief for qualifying periods of ownership.  This may (or may not) include the whole period of ownership as case law shows.  It is a very complex area; plus the changes in the October 2018 Budget may reduce the length of qualifying periods, particularly for those involved in “strange” lifestyle matters, such as moving house for career, inheriting property, getting divorced etc.

 

For many people their family home is the most valuable asset they will ever own.

 

There are opportunities to plan to mitigate tax.  Such steps are lawful and (presuming you love and respect your family more than HMRC) I believe, appropriate.

 

The only thing to note is, when you accidentally fall into assumptions (1) or (2) noted above, not only will HMRC lawfully demand the tax, plus interest for not paying on time, but also penalties.  The penalties may be up to 200% of the original tax, so you could be paying 3x the original undeclared bill.  For those not of an arithmetic mind, for a typical 28% tax rate on a residential property that is 84% of the gain, going to the Government.  In other words on a gain of £100,000, that is £84,000 plus interest that could go to the Government, just because you assumed ….

 

Of course, some people may say well that still leaves 16% of the gain, but that excludes interest, and experience says trauma and cost of getting caught.  Plus those who actually wished to use the money may have to sell their dream home.  Maybe leading to further complications?

 

However, with appropriate planning and making the right tax elections in some circumstances, the gain may be legitimately eliminated altogether.  A much better result!

 

  1. Get advice.
  2. Get it right.
  3. Document it.

 

No one likes spending money on professional advice – until they haven’t!

An Englishman’s Home is his ‘Tax Exempt’ Castle – Private Residence Relief (PRR)

CardiffCastle-Exterior41-med-A0013928-1“Everyone knows” that:-

“A person’s home is exempt from capital gains tax” – SIMPLES!

Well, no actually! In law it may get up to 100% tax relief, but it remains a chargeable disposal.

Imagine:-

1. You own more than one property (including say a holiday home overseas) OR
2. You buy a property to live in, but actually live elsewhere (say in rented accommodation) OR
3. Circumstances change over your period of ownership.

Each of these (quite common) circumstances could give rise to a nasty, unexpected tax liability. We have seen a number of situations where advice has been sought ‘Just Too Late’. This can mean a relatively small outlay “saved” on proper professional advice, results in an expensive (and potentially unnecessary) tax bill – plus, on occasion penalties, for naïve belief in the somewhat misleading phrase, set out above.

Some of the benefits of this suggestion are reflected in the recent case reported below.

Private Residence Relief Claim Rejected

Private Residence Relief (PRR) can be a very beneficial relief where the conditions are met, providing for up to 100% of a gain to be exempted where a property has been a taxpayer’s main residence throughout ownership.

Of course though careers, inheritance, divorce and the general messiness of real life, things do not always quite pan out as simply as “always” living in one house. As a result, claims made perhaps in ignorance and good faith, can lead to disagreements between HMRC and taxpayers over whether, and the extent to which, properties may qualify. This can lead to appeals, so a number of cases end up being dealt with through the courts.

One such recent case was P Lam v HMRC at the First-Tier Tribunal. The case found that a taxpayer’s occupation of the property was not sufficient to meet the conditions. HMRC accepted the taxpayer had spent some time in the property whilst she was renovating it, but they argued that the nature and extent of that occupation was not enough to qualify for relief, which requires a degree of permanence.

What may be useful for taxpayers is that the Tribunal provided a list of things that the taxpayer in this case was not able to provide as evidence. Such factors therefore appear to be key in being able to prove that occupation in a property should be sufficient for the relief. This list included:

• Proof of how many days she lived in the property
• utility bills to establish the time spent there
• moving any furniture into the house
• bringing items that would have made occupation more comfortable
• providing evidence of a change of address

Taking professional advice in advance and keeping good records will certainly make matters easier in the event of an HMRC challenge into a PRR claim. Perhaps an easier route would have been to file a timely election for the relevant property to be deemed the qualifying property.

To quote an old motto, regarding getting matters in order in advance …

“A stitch in time, saves 9”.

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.