Here is a Tax Exempt 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.