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Article in from ACCA:

It is generally well known that a person receives a valuable exemption from capital gains tax when making a gain on the disposal of a principal private residence. However, this is an area that HMRC have been looking at more closely, and there have been a few cases as a result.

In Malcolme Springthorpe [2010] TC 832, the taxpayer claimed the exemption on the basis that he lived in a property while he was renovating it. But during the period in question the property was not connected to the gas supply so there was no hot water or cooking facilities. In addition he had claimed a council tax exemption, and his correspondence was being sent to another address. His claim failed as the tribunal concluded that he did not reside at the property and his occupation was only for the purpose of repairing it.

In Anthony Metcalfe v RCC (2010) TC 753 the taxpayer in question owned several properties, but it was found that there was no electricity used at the one he claimed to be his main residence, so HMRC concluded that he had not lived there and his claim failed.

In Michael J Harte and Brenda A Harte v HMRC [2012] TC01951, Mr and Mrs Harte inherited a property (Alder Grove). They already owned a main residence (at Crofts Road) and that was where they lived, though they did occasionally stay at Alder Grove. Crofts Road was their main residence for capital gains tax purposes, but they made a section 222 claim to treat Alder Grove as their main residence during an eight day period in October 2007. HMRC denied the relief on the grounds that Alder Grove had never been their private residence. The tribunal upheld this decision on the grounds that there was not the quality of occupation, nor any intention to occupy the property, to satisfy the residence criteria.

Where a taxpayer acquires more than one private residence, he may elect under section 222 (5) TCGA 1992 to nominate one to be treated as his main residence for tax purposes. The nomination should be made within two years of the acquisition of the second property. The section 222 election can be used to allow the taxpayer to ‘flip’ from one residence to another for tax purposes and allows a taxpayer to nominate a residence for a very short time, but the property must be a residence in order to be eligible for the election.

Understanding the rules

The Private Residence Relief does have various quirks to it, and given HMRC’s recent penchant for challenging these claims, it is worth looking at the rules.

The period of ownership begins on the date the dwelling house was first acquired, or on 31 March 1982 if that is later. It ends when the house is disposed of. The final 36 months of the period of ownership always qualify for relief, regardless of how the property was used in that time, as long as the dwelling house has been the only or main residence at some point. If the dwelling house has not always been the only or main residence, the gain will need to be split. When calculating the proportion of the gain eligible for relief,  the gain is multiplied by a fraction equal to the periods of occupation (including the final 36 months where appropriate) divided by the period of ownership (both periods starting at 31 March 1982 if the house was owned before that date).

Some periods when the house is not being used as the only or main residence will still qualify for relief. These should be treated as periods of actual occupation when calculating the fraction of any gain that qualifies for relief.

If for up to a period of 12 months the new home is not occupied after acquisition because it is not possible to sell the old home, or there is a need to carry out refurbishment, up to the first 12 months can be treated as if the house had been the only or main residence in that period. In exceptional circumstances, HMRC may allow a longer period (up to a total of two years) to be treated in the same way. The same treatment applies when buying land to build a house on.

Certain other periods of absence from the dwelling house may be treated as periods of residence if:

  • during the period, there is no other dwelling house eligible for relief, and
  • both before and after the period there is a time when the dwelling house is the only or main residence.

If an individual has another dwelling house eligible for relief, for example a house or flat which was bought or rented and used as home while absent from the first property, a nomination will need to be made in favour of the original dwelling house, if the period of absence is to be treated as a period of residence at that house.

The qualifying periods of absence are:

  1. absences for whatever reason, totalling not more than three years in all
  2. absences during which the individual is in employment and all the duties are carried on outside the UK
  3. absences totalling not more than four years when:

    – the distance from the place of work prevents living at home, or

    – the employer requires the individual to work away from home in order to do the job effectively.

The exemption for absences 1 and 2 can be kept if a return to the dwelling house is not possible afterwards because the existing job requires working away again. Otherwise the periods of absence must be preceded and succeeded by periods of actual occupation in order to qualify. The absences at 2 and 3 will also apply if the employment was that of the individual’s spouse or civil partner.

If only partial relief is available because some or all of the dwelling house has been let as residential accommodation, there may be some entitlement to an additional relief-letting relief. This additional relief is due where:

  • a person sells a dwelling house which is, or has been, their only or main residence, and
  • part or all of it has at some time in the period of ownership been let as residential accommodation.

The amount of relief is the lowest of:

  • the amount of Private Residence Relief already calculated, or
  • £40,000, or
  • the amount of any chargeable gain made because of the letting (calculated as a fraction of the gain – the fraction being the period of letting/divided by the period of ownership).