The practice of electing which of several properties is a main residence for capital gains tax purposes gained notoriety at the time of the MPs’ expenses scandal. In this article we look at a recent case which highlights that the elected property genuinely has to be the taxpayer’s main residence.
The relevant law
Under the Taxation of Chargeable Gains Act 1992 in order for a residential property to be free from capital gains tax (CGT) on sale, the property has to be the only or main residence of the person selling it. An individual who owns more than one property can elect (within two years of acquiring multiple properties) which is his or her main residence and thus potentially free from CGT on sale. Once a property has been a taxpayer’s main residence then the period in which the owner occupies it is free from CGT, as is the last 18 months of ownership, even if the property is not occupied during this time.
Occupation is also relevant to the letting relief for CGT with a requirement that a property has to be occupied as a main residence at some point during the taxpayer’s ownership in order to qualify for the relief.
Mr Harrison and his dispute with HMRC
According to HMRC, in a 20 year period William Harrison claimed principal private residence relief (PPR) on nearly as many residences. During 2009/10 and 2010/11 he disposed of six properties and claimed PPR in relation to four of them. The properties in question were let periodically but Mr Harrison claimed that they were his second homes.
In line with precedents set in a line of cases, HMRC argued that for an individual to claim a property as a residence then there has to be a degree of permanence or continuity or the expectation of this, stating that, “mere occupation….does not amount to residence.”
Although provisions exist for a taxpayer to elect which one of several residences PPR should apply to, according to the First Tier Tribunal, the making of the election cannot of itself turn a property into a main residence. The question of what is a main residence is a question of fact and degree to be decided objectively. According to the First Tier Tribunal a main residence is “..not a house, or indeed, a home, that one simply stays in from time to time.” Just because the taxpayer has a residence where he prefers to be, that alone also does not make it a main residence.
In reaching their decision the Tribunal took into account the time spent in each of Mr Harrison’s properties, the degree of continuity and permanence of that occupation, the furnishings and possession held in each property, the activities carried on there, the timing of the elections, letting and sales, the council tax position and Mr Harrison’s evidence as to lifestyle.
Mr Harrison had spent very little time in the properties in question, two to three days a week in the summer only and minimal furnishings and possessions were kept there. The fact that he was resident there for council tax was irrelevant as this turned on information provided by Mr Harrison to the council and not on the council making any assessment of the position. PPR was therefore refused and CGT was due on the gains on sale, together with penalties.