Introduction »

The importance of occupation

The capital gains tax (CGT) exemption for gains made on the sale of your home (known as Principal Private Residence (PPR)) is one of the most valuable reliefs from which many people benefit during their lifetime. Only a property occupied as a residence can qualify for the exemption. An investment property in which you have never lived does not qualify.

Quality matters

'Occupying' as a residence requires a degree of permanence so that living in a property for say, just two weeks with a view to benefiting from the exemption is unlikely to work.

It would appear that HMRC are taking an interest in this particular area as there have been a number of appeals heard at the First Tier Tribunal (FTT).

Burden of proof

In one case HMRC held information that suggested that a taxpayer had disposed of a property in addition to receiving rental income from it. No mention was made of this in the taxpayer’s tax returns.

HMRC started an enquiry and the taxpayer argued that the property was his PPR but HMRC disputed this. They argued that if the taxpayer had occupied the property, it was only on a temporary basis and was not sufficient to constitute a residence. Unfortunately, HMRC also found that housing benefit was paid to the taxpayer in respect of tenants at the property at the same time as the taxpayer claimed he was living at the property. The Tribunal decided that in the circumstances the taxpayer had not discharged the burden of proof to demonstrate that he occupied the property as his PPR.

Renovating is not residing

In another case a taxpayer and his partner (now his wife) purchased a property intending to live in it as their home. However, soon after completion they discovered that the neighbours were unruly and the taxpayer’s wife changed her mind and refused to contemplate moving there. The property was sold some 4 years later and the taxpayer made a claim for PPR.

HMRC once again argued that the taxpayer had not established the property as his PPR and the Tribunal agreed. They stated that the taxpayer’s occupation of the property for a 3 month period was not a period of residence, but a period in which he was renovating the property for subsequent letting, whilst intending and expecting to continue permanent residence with his wife at her property.

No degree of permanence

One final case concerned a taxpayer who purchased an apartment and sold it some six months later. The property was furnished although he did not obtain a TV licence as the TV he took to the property had broken. Additionally, he did not install a telephone because he had a mobile phone.

His partner moved into the property but she decided she did not like the area and moved out very quickly. Shortly after this the taxpayer placed the property on the market.

The taxpayer argued that he acquired the property with the intention of living there but when his partner moved out, he changed his mind.

HMRC again disputed whether residence was established. In particular, they drew the Tribunal's attention to the fact that the apartment was heated by electricity and that the bill for the winter period amounted to just £39!

The Tribunal determined that the taxpayer’s occupation did not have any degree of permanence. At best he had temporary occupation but the nature, quality, length and circumstances of the occupation did not amount to residence.

How we can help

The PPR exemption continues to be one of the most valuable CGT reliefs. However, the operation of the relief is not always straightforward nor is its availability a foregone conclusion. Advance planning can help enormously in identifying potential issues and maximising the available relief. We can help with this. Please contact us if you have any questions arising from this article or would like specific advice relevant to your personal circumstances.

Introduction »