Private residence relief – Married couples ‘living together’ for CGT purposes

Married couples (and civil partners) benefit from favourable treatment for certain tax purposes. A common example is the ‘no gain, no loss’ capital gains tax (CGT) treatment for inter-spouse transfers (TCGA 1992, s 58). In addition, the inheritance tax spouse exemption is unlimited for transfers between UK domiciled spouses (although it is restricted to £55,000 if the transferee spouse is non-UK domiciled).

Living together
The principal private residence (PPR) rules for CGT purposes include a provision for married couples. It states that there can only be one sole or main residence for both spouses (or civil partners) so long as they live together (TCGA 1992, s 222(6)). In addition, any PPR election for their sole or main residence must be made by them both. The meaning of ‘living together’ appears clear and unequivocal on the face of it, but this will not always be the case. The term shares the same meaning as for income tax purposes (TCGA 1992, s 288(3)). The income tax legislation states that spouses and civil partners are treated as living together unless they are separated under a court order, or by deed of separation, or are separated in circumstances where the separation is likely to be permanent (ITA 2007, s 1011).

In Benford v CRC [2011] UKFTT 457 (TC), the tribunal had to consider whether the taxpayer had separated from his wife for PPR purposes. The taxpayer had purchased a property in his sole name, and later sold it at a gain. He claimed CGT relief on the property on the basis that it had been his principal private residence during a period of separation from his wife (it was common ground that she had never occupied the property). HMRC subsequently raised a CGT assessment under the ‘discovery’ rules in respect of the property disposal. The taxpayer appealed. The onus of proof was on the taxpayer to establish on a balance of probabilities that the property was occupied as his residence during the period he owned it, and that during this time he was separated from his wife in such circumstances that the separation was likely to be permanent. The tribunal said that whether the taxpayer occupied the property was a question of fact. Having considered the evidence, the tribunal found that he did indeed occupy the property during his period of ownership.

However, the tribunal also noted an absence of "convincing documentary evidence" to show that the taxpayer lived in the property, a lack of furniture and appliances there and a very small amount of electricity used. The tribunal held that there was not sufficient assumption of permanence or degree or expectation of continuity to turn such occupation into residence. In terms of whether Mr and Mrs Benford's separation was likely to be permanent, the tribunal concluded that the taxpayer had not discharged the burden of proof required to demonstrate that he was separated from his wife in such circumstances that the separation was likely to be permanent. It was therefore held that he should be treated as living with his wife for CGT purposes. As mentioned above, TCGA 1992, s 222(6) provides that there can only be one residence or main residence for a husband and wife living together. As Mrs Benford had never lived at the property bought by Mr Benford, the matrimonial home was considered to be the taxpayer's main residence. The taxpayer's appeal was dismissed.

Conclusion

This case emphasises the need for taxpayers to provide satisfactory evidence to support claims or assertions in enquiry cases. The burden of proof in tribunal cases is on a balance of probabilities. The concept of 'living together' for tax purposes is not always straightforward, and can be counterintuitive. For example, if one spouse (or civil partner) is resident in the UK but the other is non-resident, they may still be treated as living together, assuming that they are not separated (Gubay v Kington [1984] 1 All ER 513, HL). Some care is therefore needed to ensure that a couple satisfies the statutory definition of living together in the relevant tax year.

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