Readers will probably be aware that any gain on the sale of your home is not usually subject to capital gains tax (CGT).
This is because an individual’s private residence benefits from Principal Private Residence Relief (PPR Relief) and is exempt for CGT purposes. However, recent case law reminds taxpayers that the rules of PPR Relief are not quite as generous as you might first think.
Mr Gibson purchased a property in 2003 with the help of a mortgage and a significant loan from his friend, Mr Reid. He moved into the property about one month after purchase with the intention of carrying out some renovations and then moving in his girlfriend, Caroline.
In early 2004, Mr Gibson’s architect advised that, given the volume of work required, it would be cheaper to demolish the existing building and start from scratch. Further funds were advanced by Mr Reid to assist with the rebuilding costs and Mr Gibson moved into Caroline’s house during construction.
By 2005 Mr Gibson realised that he could no longer afford to live in the property and keep up with his loan repayments. The house was completed in the summer of 2005. Mr Gibson moved in once the plumbing had been installed and the property was put on the market shortly afterwards. The property sold in February 2006 and Mr Gibson did not declare the gain to HMRC, believing that the proceeds were subject to PPR Relief.
In October this year, the Tax Tribunal found that PPR Relief was not available to Mr Gibson.
The Tribunal considered the possibility that the renovations and subsequent sale may represent some form of joint venture by Mr Gibson and Mr Reid on the basis that Mr Reid had advanced such a large sum of money (thought to be around £920,000) as a favour to a friend without any security. Further, Mr Reid’s name was given in the planning applications, he was awarded a “fee” of £50,000 upon sale and it was discovered that he held a beneficial interest in some of Mr Gibson’s other properties.
However, the Tribunal ultimately based their decision on 2 key questions: whether the house that was purchased in 2003 was the same “dwelling house” as the property sold in 2006; and whether Mr Gibson occupied the property as his principal or main residence prior to sale.
The Tribunal held that the property sold was not the same as the property originally purchased because the original building had been demolished and the replacement was not the same in size, layout, appearance or value as the original.
Secondly, the Tribunal found that Mr Gibson did not occupy the property as his principal residence despite the fact that he did not have any other property which might qualify as such. The Tribunal looked at previous case law where a distinction had been made between “occupation” and “residence”. In these cases the Tribunal had considered whether the nature of the taxpayers’ occupation had carried “some assumption of permanence, some degree of continuity, some expectation of continuity to turn mere occupation into residence”.
This not only looked at the length of time the property had been occupied but also the quality of that occupation. In this case the Tribunal considered that the decision to sell the property was made before Mr Gibson moved in in late summer of 2005. Accordingly, there was never any “expectation of continuity”.
Home owners should be aware that access to PPR Relief is not guaranteed by mere occupation of a property. HMRC will consider all sorts of relevant factors when determining whether a sale is exempt for CGT purposes including: whether the property is properly furnished; whether the property benefits from the usual facilities you would expect in a home such as internet, hot water, electricity and cooking facilities; whether the address is registered as a correspondence address with the bank or used on other applications; and when the decision to sell the property is made.