Relatively straightforward right? But what happens if there is a period of time when a person isn’t resident at the property? The answer is that unless there are periods where you can be deemed resident even through you weren’t living at the property, for example times away from home connected to your employment, then the proportion of any gain will not be exempt from capital gains tax. Say for example, you owned a property for ten years, and for 6 years of that time, you lived there and for 4 years you lived elsewhere, 4/10th of the gain would be subject to capital gains tax. As you would take 6/10ths of the gain (this is your PPR relief) and deduct it from your gain.
So is that the end of the story? No, not really. HMRC accept that it takes time to sell a property, and so there may be times when you are living in your new house, but your other house is waiting to be sold. At this point in time, you don’t own two properties because you are looking to make a profit on the sale of the property, it just hasn’t sold as yet. Therefore, the last 18 months of property ownership are “deemed residence”, i.e. it doesn’t matter where you lived in that period, you are deemed to be living in that property. In the case of the ten year example, the PPR would increase to 7.5 years with the additional 18 months. If the property had been let out then a claim for lettings relief could reduce the gain still further.
But these issues do not address the highly important question of when a residence is not a residence for tax purposes. It is a common misconception that all that is needed to qualify for PPR Relief and avoid capital gains tax is to move in to a property and live there for a short while. Various tax cases considered the quality of the occupation and the degree of permanence in cases like this and HMRC had a series of victories in cases where it could be seen that the property owners had moved in solely to renovate and sell the property, or simply to try and justify a claim for PPR.
In the Gibson case, Mr. Gibson bought a house and moved into it, claiming that he intended to extend the existing house for future use as his matrimonial home. Owing to the cost of alterations of the house, he instead ended up demolishing it and rebuilding from scratch. However, for financial reasons he then had to sell the property. Prior to sale, although he ‘camped’ in the property with basic furniture for four or five months, the ‘quality’ of occupation of the house was not sufficient to make it his sole or main residence - it being accepted that he no longer intended to make the house his permanent residence when it was complete. This was on the basis that there was no degree of permanence or expectation of continuity of occupation that amounted to it being his residence. The tribunal also heard that a significant proportion of the financing was provided by a friend, and that Mr Gibson paid him a £50,000 fee. That, plus the fact that the two had been involved together on property acquisitions previously, may also have coloured the tribunal’s views.
The Gibson case follows on from two other PPR cases, Moore and Morgan where the owners lived in their properties only for short times.
Mr. Morgan bought and occupied a house intending it to be his future matrimonial home but ceased to occupy it after his fiancée broke off the engagement. He then let out the property for a long time before eventually selling it.
Mr. Moore moved into a property that he already owned and had previously rented out. At that point he did not know whether he would want to make that property his permanent home but soon decided that it would not suit his future needs, so he sold it.
The difference between the two cases was that:
- Morgan did occupy his house with the intention that it would be his home;
- Moore never formed the intention of making that house his permanent home.
There are many facets and complexities to PPR relief for which this article has touched on only a few. It should never simply be assumed that you will qualify for Private Residence Relief, particularly in cases of short occupancy. For more information or to see if you qualify contact Neill Staff on 0203 146 1605. You can also email him on neill.staff@raffingers.co.uk.
Article by Neill Staff
Partner
Sign up to our newsletters to be kept up-to-date with the latest tax news.