Mark McLaughlin points out that making a main residence election does not of itself make the property a ‘residence’ for capital gains tax private residence relief purposes.
Many individuals will benefit from private residence relief (PRR) for capital gains tax (CGT) purposes (TCGA 1992, s 222) without knowing very much about the relief. Other individuals will be familiar with PRR, and some might seek to use the provisions to their advantage.
For example, the PRR legislation includes the facility for an individual to make an election to determine which one of two (or more) residences is the individual’s main residence for any period, within a specified two-year timeframe (see s 222(5)). This election facility has previously received considerable publicity and allegations that the PRR rules were being exploited in certain cases (e.g. some MPs were accused of ‘flipping’ their residences to reduce CGT liabilities). This resulted in a tightening of the PRR rules, including in relation to non-resident CGT disposals. However, this article concentrates on UK resident individuals and properties.
Where it can be established that there are two or more residences, the election generally allows the individual to decide conclusively which residence should be treated as the main one for PRR purposes. HMRC cannot subsequently argue that the elected residence is not the individual’s main residence (although they unsuccessfully tried to do so in Ellis v HMRC [2013] UKFTT 775 (TC)). HMRC’s own guidance points out (at CG64485): ‘When nominating which residence is to be treated as the main residence, an individual is not obliged to nominate the residence which is factually his or her main residence; they may nominate whichever residence they choose.’
Is it a residence?
A fundamental requirement for the above election is that the relevant property is a residence of the individual. Unfortunately, there is no statutory definition of ‘residence’ for these purposes. This has resulted in a number of cases before the courts and tax tribunal.
This ‘residence’ requirement has the potential to be overlooked, or possibly misunderstood. In Harrison v Revenue & Customs [2015] UKFTT 539 (TC), the taxpayer owned a farmhouse. He also owned, and disposed of, a number of flats in respect of which he claimed PRR. HMRC opened an enquiry into the appellant’s tax return for 2009/10, and subsequently challenged the taxpayer’s PRR claims for 2009/10 (and also 2010/11). The taxpayer appealed. He informed the First-tier Tribunal that he had always considered the farmhouse to have been his main residence, and that the other properties were ‘second homes’, which he had elected to be his main residence.
The tribunal considered case law on the meaning of ‘residence’ (i.e. Goodwin v Curtis CA 1998, 70 TC 478, and Frost v Feltham Ch D 1980, 55 TC 10). It also considered the amount of time spent in each of the properties, the degree of continuity and permanence, the expectation of continuity, the furnishings and possessions, the activities carried on, the timing, council tax elections and the appellant’s evidence as to his lifestyle at the relevant time. The tribunal found that the farmhouse was at all relevant times the taxpayer’s only or main residence. No other property met the legal test. The quality of the appellant’s occupation of his second homes (i.e. the degree of permanence, the degree of continuity or the expectation of continuity) was not sufficient to amount to ‘residence’ within s 222.
The taxpayer’s appeal against CGT was dismissed (n.b. HMRC also assessed penalties on the basis that the taxpayer’s behaviour in submitting incorrect returns was deliberate, but the tribunal found that the appellant’s behaviour was careless instead, so the penalties were reduced and the taxpayer’s appeal was allowed in part).
Practical Tip:
PRR is only available on the disposal of a dwelling house that has been the individual’s only or main residence at some point (TCGA 1992, s 222(1)(a)). Any property subject to a main residence election must also satisfy a residence requirement, i.e. the election must be between dwelling houses that are both residences; the election is not a ‘magic pill’ that of itself transforms an occupied property into a residence.
