31 July 2018
As you may know 222 is one of my favourite numbers. The reasons why will be left for another time. Coincidentally, the UK’s top tax relief is found in s222 Taxation of Chargeable Gains Act 1992. It is the reason you will typically not pay any Capital Gains Tax on the disposal of your home. The gain on your home is likely to be the largest gain you make in your life. It is vitally important you meet the criteria to ensure you get the benefit of this most lucrative relief.
As you might expect the relief is increasingly being challenged by HMRC and the decision on the most recent case was released on 15 June 2018. Lam  TC 06540. Unfortunately for Mrs Lam she lost! Lessons can be learned to ensure you get it right.
The taxpayer, Mrs Lam, contended the property in question was purchased with the intention it would become her main residence. Mrs Lam claimed that she and her husband had spent time at the property.
Mrs Lamʼs 2013-14 tax return did not include the net proceeds of the sale of the property as either income or a capital gain. HMRC commenced an enquiry into Mrs Lamʼs 2013-14 tax return. HMRCʼs opening letter stated that the focus of the enquiry was the potential capital gain on the disposal of the property. HMRC concluded their enquiry, finding initially that the purchase, redevelopment and sale of the property was a venture in the nature of a trade. A closure notice was issued charging income tax of £15,397 on the net proceeds of the sale. To make matters worse a tax geared penalty of £8,083, representing 52.5% of the culpable tax, was also issued on the basis that Mrs Lam had deliberately omitted the proceeds of the ‘business venture’ from her 2013-14 tax return. Mrs Lam appealed.
The Court of Appeal case of Goodwin v Curtis and later cases have established that to determine whether a property qualifies as a principal private residence, the following factors must be considered:
- Whether the property was actually occupied as a residence
- The nature, quality, length and circumstances of a taxpayerʼs occupation of the property
- Whether the occupation was intended to be permanent or merely temporary
- Whether there was a degree of continuity or some expectation of continuity to turn mere occupation into residence. The need for permanence or continuity should not be overstated as it is only one of the factors to be taken into account in weighing up all of the evidence.
The First Tier Tribunal (FTT) considered that for the principal private residence relief to arise, the property must have been occupied and the occupation must exhibit a degree of permanence and expectation of continuity. Mrs Lam and her husband had resided at the property overnight for a few days, sleeping in sleeping bags. They had not moved personal furniture into the property.
The FTT distinguished between occupation and residence. The question of when occupation becomes residence is one of fact and degree for the Tribunal to decide. Residence is usually defined as ‘the dwelling in which a person habitually lives; in other words, his or her home.’ The test of residence is considered to be one of quality rather than quantity.
The FTT identified that periods of occupation during, or in readiness for renovation can be distinguished from periods of living in a property. Furthermore, the FTT noted that there must be sufficient documentary or other evidence to support a claim that the property was occupied as the main residence. The FTT considered the facts and evidence provided by Mrs Lam in support of her appeal and noted that:
- We have not been provided with evidence of the number of days Mr and Mrs Lam actually lived at the property. No evidence has been provided in support of their claim that they lived at the property five days a week between its purchase in August 2011 and December 2011, when it became uninhabitable. Utility bills, for example electricity, gas and water rates have not been produced, despite being requested by HMRC. These could have established with some certainty the length of time Mr and Mrs Lam spent actually living in the property and the quality of their occupation, that is, whether they spent time eating, sleeping, relaxing, cooking and washing there. No third party evidence eg. of neighbours or others has been provided.
- Mr and Mrs Lam did not move any of their furniture into the property. We understand the reason for that, but no evidence has been provided to show that they brought any kitchen equipment or modest items of furniture, convenience or personal possessions that would have been essential for them to actually live in the property and make their occupation more comfortable.
- No evidence has been provided of a change of address, for example bank statements, credit card statements, home insurance, benefit claims (given Mr Lamʼs infirmity) or other official documentation, television licence, changes to their registered doctor or dentist.
Without such evidence the FTT concluded it cannot therefore be said that the property was Mrs Lamʼs ‘only or main residence’ within the meaning of s 222. Mrs Lam lost.