08 Nov Private Residence Relief
I was recently reading about a serial property investor who lived two months in a property which he later sold for a profit and he was refused private residence relief (PRR) by HMRC. He appealed to the tribunal and I look at what the outcome was and why is this case important?
An important case?
Richard Dutton-Forshaw v HMRC TC4644 (RDF v HMRC) involved a dispute over whether or not a property qualified for capital gains tax (CGT) private residence relief (PRR). It could have been just one of the many run-of-the-mill cases involving PRR that reach the courts. But as soon as we started to read the judgment we knew it would have far-reaching implications.
A complicated background
RDF split his time between a property in London, where his work was based, and one in Lymington. He sold the latter in March 2006 and bought another house in the same area, which he intended to move into with his girlfriend. However, the relationship ended before that could happen and RDF was unsure what to do. He decided to move into one of his two London properties (the other he let out) where he lived for two months. He then decided to live in the Lymington property after all. He moved out of the London property and let it. It was sold in 2009 and RDF claimed PRR on the gain he made. HMRC refused it and sent him a bill for £40,000 instead.
HMRC argued that RDF didn’t occupy the London property with the intention of it being his residence, and so PRR was not due. It pointed to various factors which it said showed he always planned to move to the Lymington property, such as being put on the electoral register and having his mail directed there. RDF’s counter argument was that he did those things when he thought he was going to move to Lymington and only neglected to notify the authorities in London because of complications in his family life. The tribunal believed RDF’s version of events and this was enough to swing the judgment in his favour.
What’s a residence?
The vital factor in RDF’s case, and in any dispute with HMRC involving PRR, is that a property should count as a residence. It’s not enough to just occupy it. It should appear to outsiders as if it’s your home.
Establishing a residence
While the pointers which HMRC look for when considering if a property is a residence aren’t decisive, they will help your claim for PRR if it comes to a dispute.
Tip 1. If the property is to be your home for a short time get your family members’ names put on the local electorial register as soon as possible. Join the local library, notify your accountant and HMRC of your new address. Basically take any steps which indicate or imply permanence.
Tip 2. The position is more tricky if you have more than one residence, say a main home and a holiday home. It’s important to keep a record of the time you and your family spend in each. Again take steps which, in a dispute with HMRC, illustrate that you occupy both properties as a home, e.g. by keeping clothes and personal possessions in each. Also make local contacts, e.g. a newspaper subscription from the newsagent. Written or oral evidence about the time you spend in a property can be compelling, especially to a tribunal.
The taxpayer won proving that a property can qualify for PRR even where you live in it for a short time. If you expect that might happen take steps so you can prove the property is your residence. Apply to be put on the electoral register, join local institutions such as the library and notify HMRC, etc. of your new address.