06 Jan Update on residence for CGT purposes
MULTIPLE RESIDENCES AND TAX
The number of people owning more than one home has greatly increased in the last two decades, and the government seems to view this as an unwelcome trend. As a result the Autumn Statement 2015 targeted those buying second and subsequent residential properties (not just buy-to-lets) with a higher rate of SDLT from 1 April 2016. More significantly, restrictions to private residence relief (PRR) were introduced in April 2014 and 2015 in the aftermath of the MPs’ property flipping debacle.
HMRC also seems to be ramping up pressure, if the number of cases involving PRR claims heard by tribunals is anything to go by. Its attacks are focused claims that properties qualify as residences for the purpose of s.222 TCGA 1992.
RESIDENCE OR HOME?
While for most people there’s little or no distinction between the meaning of “home” and “residence” the courts have consistently drawn a line between the two. This is important because s.222 speaks in terms of residences and not homes. A home is something more than a residence. For example, a pied-à-terre in the city in which a client spends relatively little time, and their family virtually none at all, is likely to count as a residence, but they probably wouldn’t regard it as their home.
HMRC’s current guidance doesn’t help. It blurs the line between homes and residences. Several examples of this are found in its Helpsheet HS286. So let’s be clear, to claim PRR it is only necessary to show that a property is a residence, not a home.
RESIDENCE FOR CGT PURPOSES
HMRC relies heavily on the definition of residence given in the case of Goodwin v Curtis 1998 which is an appeal court judgment refusing a claim for PRR. In it the judges took the view that for a property to be a residence a person must“dwell permanently or for a considerable period of time” in it. While later judgments accept this as a reasonable view they point out it has shortcomings. Essentially they give weight to intented and actual use rather than the permanance factor.
Tax legislation doesn’t define residence and therefore its common-use meaning applies for the purpose of s.222 . As a rule of thumb, if a taxpayer occupies a property with the intention that the arrangement should be long-term (even if circumstances cause it not to last) and the property has the trappings of a personal residence, e.g. personal possessions and usual domestic facilities, then it’s capable of being the subject of a claim to PRR. Any attempt by HMRC to refuse relief should be resisted, as it was in the case of Richard James Dutton-Forshaw v HMRC 2015 (see Follow up ).
The judgment in Dutton-Forshaw , which went in favour of the taxpayer, provides an excellent analysis of the meaning of residence as well as a summary of other relevant judgments. If you’re involved in a PRR dispute with HMRC on behalf of a client, a thorough reading of pages 8, 9 and 10 of the ruling would be time well spent.
Even if HMRC accepts that a property is a residence there are statutory exceptions that restrict PRR.
- s.222(3) can limit relief to gains relating to residences situated on land larger than half a hectare
- s.223(3) prevents relief where the owner is absent for periods exceeding three or four years
- s.224(3) prevents relief where a “dwelling-house” was acquired “wholly or partly for the purpose of realising a gain from the disposal of it” . However, expecting to make a gain is not sufficient to trigger this rule. Where a client chooses to buy one property over another because they thought it would be a better investment is not something HMRC seeks to attack – presumably because it would be difficult.
Whether a property is or is not a residence is a question of fact. This is a point HMRC frequently makes. Of course, in order to demonstrate facts you must have evidence. Therefore while evidence doesn’t itself determine the status of a property, trying to convince HMRC without it is a lost cause. You should advise clients, especially those with more than one residence, to build up as much documentary and third party evidence as soon as they can – for example:
- get family members’ names put on the local electoral register as soon as possible
- join the local library and other organisations
- notify you and HMRC of the new address. Basically, take any steps which indicate or imply intended permanence of occupation.
MORE THAN ONE RESIDENCE
Putting together evidence for a second property, such as a holiday home, might be more difficult. However as a starting point you should advise clients to keep a record of time spent by each family member at the property. Also tell them to take steps which in a dispute with HMRC illustrate that they occupy a property as a residence. For example, by making local contacts, e.g. having an account with local shops etc. Holding social events for local friends who then might be willing to make statements about the nature of your client’s use of the property can be helpful.
Pro advice. In most types of tax dispute HMRC and tribunals find third party statements persuasive evidence.
ELECTING YOUR MAIN RESIDENCE
Only one residence at a time can qualify for PRR. Where a client has two or more residences s.222(5) allows them to choose which counts as their main one and so qualify for PRR. This must be done by a written election within two years (or any longer period allowed by HMRC) of there being a change in the number of residences a taxpayer has.
Example. A client owns a house which they live in full time and a property they let. No s.222(5) election in favour of the let property can be made as it is not their residence. On 1 April 2016 they cease to let the property and immediately start to use it as a weekend home. The client has until 31 March 2018 to make an election for the let property to be their main residence.
Pro advice. Once made an election can be varied (flipped) between residences an any time. So you can elect for one residence for just say two weeks and then switch it to another (say the original) residence. The two weeks as the nominated main residence will guarantee that the final 18 months of gain qualify for PRR. A variation can be backdated up to two years.
DOUBLING UP RELIEF
The tax saving that can be achieved from making an election shouldn’t be underestimated. Not only does it secure PRR for the period of the election, but also the final 18 months of ownership. Plus, if the property has been let at any time s.226relief (letting relief) is available.
Clients are often surprised to learn that the property does not need to have been an only or main residence before letting – as long as it was one at some point.
The amount of letting relief for a property is the lesser of:
- the amount of chargeable gain relating to the let period (this doesn’t include any part of the gain covered by PRR)
- the amount of PRR allowable
Pro advice. If you consider there is a possibility of PRR applying, an election under s.222 should always be made for a second home, even if only for a short time. If ultimately it’s proved that PRR doesn’t apply to the second property then the election won’t detrimentally affect relief for the first. If however you don’t recommend an election, and PRR on the second property is lost as a result, your client might (rightly) want to know why you didn’t suggest it.