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The sale of any property is taxed under the capital gains tax (CGT) rules unless covered by exemption or subject to a specific tax relief. Private residence relief (PPR) is one of the better known and well used of such reliefs. However, we are so used to saying that the sale of a main residence is CGT-free that we are in danger of forgetting that there are two conditions that must be satisfied for a claim to succeed:
- the property must not have been purchased for the sole reason of making a profit (note the word ‘sole’) and
- the property must be an individual’s only or main residence throughout the period of ownership (note the phrase ‘only or main’).
Legislation does not define exactly what constitutes a ‘residence’ but the courts are looking for “permanence, … a degree of continuity and expectation of continuity to turn mere occupation into residence.” When considering whether a property is PPR exempt HMRC will not only look at the length of ownership but also what could be termed as ‘quality’ relying on the text in HMRC’s Capital Gains Tax Manual CG64441 which states that “occasional and short residence can make a residence; but the question is one of fact and degree.” However, in practice, the longer the better does appear to be the rule. Recent tribunal cases reveal that HMRC are querying situations where a property is being renovated before sale and as such can only be lived in for a (relatively) short period.
However, that does not mean that living in the property for a short period denies relief as the case of David Morgan v HMRC (2013) shows. The taxpayer and his girlfriend were engaged and (importantly) both names were on the mortgage offer. The couple split up, but Mr Morgan continued with the purchase, moving into the flat for two weeks, specifically to prepare it for renting. The tribunal found that, notwithstanding the short period, he actually lived in the property and had intended to occupy it as a residence, the proof being that his girlfriend’s name appeared on the mortgage deed.
Recently HMRC have been targeting self-build builders, questioning whether the property really has been built with the intention of being the main residence. If a self-builder repeats the process of building, moving in and moving on, rolling equity gains into subsequent houses each time they could avoiding CGT. HMRC may take the view that the self-build has become a business and seek to tax the gains as income particularly if no other sources of income can be demonstrated or the person actually doing the self-build is working in the building trade already.
HMRC will require proof that the property has actually been lived in as the PPR. The following are suggestions:
- Documentary evidence in particular utility bills in the owners’ name at the property address. Other receipts for home insurance, telephone bills, DVLA records or credit reference agency records should be kept.
- The property address being on the electoral register in the owners’ name.
- Receipts confirming purchase of furniture and so on for the property e.g. delivery confirmation proving delivery to the property address under the owners’ name.
- Bank accounts registered at the address.
- Confirmation that the mortgage plan has reverted back to a standard plan and away from a ‘buy to let’ mortgage, if relevant.
A final suggestion is for the owner to introduce themselves to the neighbours to let people know who actually lives there.