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CGT principal private residence relief: residence shown by taxpayer's intention
Practical Law UK Legal Update 3-528-5652 (Approx. 4 pages)
CGT principal private residence relief: residence shown by taxpayer's intention
by PLC Private Client
| Published on 13 May 2013 • United Kingdom |
Principal private residence relief for capital gains tax was available where the intention of the taxpayer showed that he was resident, even if he changed his mind soon afterwards, the First-tier Tribunal has held. (Morgan v HMRC [2013] UKFTT 181 (TC).)
Speedread
Principal private residence relief (PPR) for capital gains tax was available where a taxpayer took up residence in a property with the intention that he would occupy it with his fiancée and use it as their matrimonial home, even though that intention changed soon afterwards when his fiancée left him for another man, the First-tier Tribunal has held. Although the circumstances of this case were unusual and the decision to allow relief was finely balanced, the tribunal's consideration of what constitutes residence for PPR is useful in that it shows that it does not depend on the quality or duration of the occupation but merely on the taxpayer's intention at the relevant time, which could be temporary. (Morgan v HMRC [2013] UKFTT 181 (TC).)
Principal private residence relief
Individuals are subject to capital gains tax (CGT) on gains arising on the disposal of assets. Broadly, principal private residence relief (PPR) is available where:
- A dwelling-house (or part of a dwelling-house) has been an individual's only or main residence at some time during his period of ownership (section 222(1)(a), Taxation of Chargeable Gains Act 1992 (TCGA 1992)).
- The dwelling-house was not acquired for the purpose of realising a gain on its disposal (section 224(3), TCGA 1992).
Provided the dwelling-house has qualified for PPR at some point during the individual's period of ownership, the last three years always qualifies for the relief (known as the "final period exemption") (section 223(1), TCGA 1992). This is the case even if it is no longer the individual's only or main residence (for example, because it is let out to a third party).
If PPR is restricted due to (all or part of) the dwelling house being rented out as residential accommodation, letting relief may be available (section 223(4), TCGA 1992). Although commonly referred to as a relief, letting relief is not a stand-alone CGT relief, but rather an aspect of the calculation of PPR and is only available where the dwelling-house qualifies for PPR at some point during the individual's ownership. The amount of the relief is the lower of:
- The amount of PPR available on the disposal of the dwelling-house under section 223(1) to (3) of TCGA 1992 (that is, the amount of PPR available, ignoring letting relief).
- The gain relating to the letting period.
- £40,000.
Facts
Mr Morgan arranged to buy a property when he got engaged to his fiancée. Contracts were exchanged but, two weeks before completion, the fiancée broke off the engagement. After completion, Mr Morgan moved into the house fully expecting his fiancée to relent and return to him. After two months of living there, however, realising that, without a financial contribution from her, he could not afford to live in the house, he rented it out. The property was let for just under five years, during which time Mr Morgan lived with his parents. After that period he moved back into the property and sold it four months later.
HMRC issued an assessment on the basis of the rental income received and in relation to the capital gain made on the disposal of the property. Mr Morgan queried whether he was liable for CGT, claiming that he had used the property as his residence when he had moved in straight after it had been purchased and also when he had occupied it prior to selling it. HMRC, relying on the non-tax case Fox v Stirk, Ricketts v Registered Officer for the City of Cambridge [1970] 3 ER 7, regarded these periods of occupation as temporary, with Mr Morgan having no settled purpose of residing. Mr Morgan was simply living in the property while he decided what to do.
Decision
The First-tier Tribunal (Judge Jill C Gort and Dr Christina Hill Williams DL) held that, although the matter was "extremely finely balanced", whether Mr Morgan had been resident would depend on what was in his mind when he moved into the property after it had first been bought. The tribunal expressed the view that:
Mr Morgan need only show that at the time when he moved into the property it was his intention to make it his permanent residence, even if he changed his mind about that the following day.
The quality of Mr Morgan's occupation was not relevant. What was relevant was his intention. If Mr Morgan had formed the intention to let the property by the time he moved in then the position would have been different, but there was no evidence that he had resolved to rent at that point. Mr Morgan was still hoping that his fiancée would return. Given his intention, the property was Mr Morgan's residence at that time and he should be allowed PPR.
Comment
Although the circumstances of this case were unusual and the decision to allow relief was finely balanced, the tribunal's consideration of what constitutes residence in the context of PPR is useful in that it shows that it does not depend on the quality or duration of the occupation but merely on the taxpayer's intention at the relevant time, which could be temporary.
Case
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