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Mark McLaughlin highlights a potential stumbling block for taxpayers seeking to claim capital gains tax relief on the disposal of a residence.

The fundamental requirement for an individual to claim capital gains tax relief on the disposal of a dwelling house (or an interest in it) is that all or part of the dwelling has been the individual’s only or main residence at some time during the period of ownership (TCGA 1992, s 222).

Permanence and continuity

Some recent tribunal cases have considered whether property was occupied as the taxpayer’s only or main residence: Favell v CRC [2010] UKFTT 360 (TC), Moore v CRC [2010] UKFTT 445 (TC), Metcalfe v CRC [2010] UKFTT 495 (TC) and Springthorpe v CRC [2010] UKFTT 582. A detailed analysis of each case is beyond the scope of this article, but the following general principles are perhaps worthy of note:

1) Whether or not a property was the taxpayer’s only or main residence is a matter of fact. The onus is on the taxpayer to prove (on a balance of probabilities) that this is the case.

2) There needs to be sufficient documentary or other evidence to support a claim that the property was occupied as the taxpayer’s only or main residence (Favell, Moore and Metcalfe).

3) Letters or statements from third parties to support the taxpayer’s assertions are unlikely to be conclusive (or necessarily even persuasive) in the absence of other supporting evidence (Favell and Springthorpe).

4) There should be a sufficient expectation of continuity rather than occupation of the property on a temporary basis (Favell); and

5) Periods of occupation as a residence are distinguishable from periods during which the property was being renovated or refurbished, as the latter may lack the necessary quality to turn mere occupation into being a residence, in the absence of a lack of definite intention to do so (Moore and Springthorpe).

The Court of Appeal decision in Goodwin v Curtis [1998] STC 475 was considered in all four tribunal decisions. The original issue in that case was whether a farmhouse was the taxpayer’s only or main residence during the period of 32 days when he lived there. The General Commissioners held that the taxpayer’s occupation of the farmhouse did not amount to residence. The Court of Appeal upheld the Commissioners’ decision. Millett LJ said: ‘Temporary occupation at an address does not make a man resident there. The question whether the occupation is sufficient to make him resident is one of fact and degree for the Commissioners to decide.’ He added ‘The substance of the Commissioners’ finding taken as a whole, in my judgment, is that the nature, quality, length and circumstances of the taxpayer’s occupation of the farmhouse did not make his occupation qualify as residence. This conclusion was, in my judgment, clearly open to them.’ In addition, Schiemann LJ said: ‘I accept, as did the Commissioners, the Crown’s contention that in order to qualify for the relief a taxpayer must provide some evidence that his residence in the property showed some degree of permanence, some degree of continuity or some expectation of continuity.’ HMRC’s view is that ‘residence’ should be given its ‘ordinary’ meaning, which it defines as ‘the dwelling in which that person habitually lives; in other words, his or her home.’ The test of residence is considered to be one of quality rather than quantity. HMRC accepts that ‘there is no minimum period of occupation that would enable an individual to establish a residence.’ However, this is subject to the general caveat that every case must be decided on its individual facts (CG64435).

Supporting evidence

Documentary evidence to support a claim for only or main residence relief would obviously help the taxpayer’s cause. But what type of evidence should be maintained? The above tribunal cases indicate that possible sources of supporting evidence include the following: Utility bills (eg water rates, gas or electricity usage). Bank statements (what is the taxpayer’s stated address?). Council tax for the property. Electoral roll. Home insurance. Telephone bills. Housing benefit claims. other official documentation (eg television licence, DVLA or credit reference agency records); and Where are the taxpayer’s clothes, furniture, personal possessions etc kept? In addition, a number of other potential factors are listed in HMRC’s Capital Gains Manual, in the context of determining which of two dwellings should be regarded as the taxpayer’s main residence, in the absence of a nomination under TCGA 1992, s 222(5). These include the location where the taxpayer is registered with a doctor or dentist, and (where applicable) where the family spends its time or the children attend school (CG64545).
Mark McLaughlin CTA (Fellow) ATT TEP is a consultant to professional firms, and Managing Editor of TaxationWeb (www. taxationweb.co.uk). He can be contacted by e-mail at tax@markmclaughlin.co.uk.

Written by Ellie MacKenzie

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