The Capital Gains Tax (CGT) relief on disposal of an individual’s only or main residence is very valuable and well known. Taxpayers are generally aware of the need to reside in the property, which is a fundamental requirement for principal private residence (PPR) relief. However, what degree of permanence and continuity is necessary to qualify for PPR?
In Clarke v CRC  UKFTT 619 (TC), HMRC raised assessments on the taxpayer, on the basis that he was not entitled to PPR relief in respect of two properties. Prior to purchasing those properties, he lived at the matrimonial home with his wife and two daughters. Following marital difficulties, he purchased a property (Property 1) on 17 July 2002, improved it and moved in with his eldest daughter. He considered Property 1 to be his PPR from the time of moving in (as soon as he completed on the property), and had acquired it with a view to permanently leaving the matrimonial home. He used a twelve month business loan from Nat West bank, as this was the fastest and cheapest route for him to raise the necessary funds.
The taxpayer subsequently developed land attached to Property 1. He obtained planning permission to build Property 2 on 15 November 2002. In order to raise funds to do so, Property 1 was put on the market in December 2002 and sold in March 2003. The taxpayer then stayed at his mother’s house. He started work on Property 2, and began living there in July 2003. In July 2005, his wife attempted to commit suicide, and he moved back to the marital home to protect his children. Property 2 was put on the market, and was sold in November 2005. The former matrimonial home was subsequently sold, and the taxpayer went to live in a converted house with his children.
HMRC submitted that at no time in the period of ownership was either of the two properties the taxpayer's only or main residence. HMRC also argued that there was no intention to live permanently in either property, and no evidence had been provided to show any degree of permanence or continuity.
The tribunal considered the circumstances of the case, and found that when the taxpayer moved into Property 1 he intended to live there permanently. There had been a necessity to move out of the marital home. The twelve month business loan from Nat West had been the fastest and cheapest route for the taxpayer to raise the funds to purchase the property, and his intention was to sell the land attached to the house to pay off the bank loan. The tribunal also found it credible that after planning permission was obtained he decided to develop Property 2 himself, and accepted that he had to move back to the martial home after the suicide attempt by his wife. The tribunal held that the taxpayer was entitled to PPR relief in respect of the two properties, and allowed his appeal.
Permanence and continuity
When considering whether an individual potentially qualifies for PPR relief on the disposal of a dwelling house, HMRC appears to look at certain fundamental issues. Firstly, did the individual occupy the property as his or her only or main residence; secondly, if (s)he did reside in the property, was there a degree of permanence and continuity to indicate that the individual intended to occupy the property as his or her home.
On the ‘occupation’ issue, it should be noted that the PPR relief provisions allow certain ‘deemed’ periods of occupation, such as the last 3 years’ ownership. However, the dwelling house must have been physically occupied as the individual’s residence at some time during his period of ownership to qualify for relief. HMRC considers that an intention to occupy is not enough (CG64465).
With regard to HMRC’s ‘permanence and continuity’ requirement, HMRC appears to derive this requirement from (non-PPR relief) case law on the meaning of ‘residence’, and on the judgment in the PPR relief case Goodwin v Curtis  STC 475. In that case, the taxpayer had only lived in a farmhouse for 32 days. It was held that he had not intended to occupy it as his permanent residence.
In the Clarke case, HMRC accepted in correspondence that the appellant resided at Property 1, but argued that he did not intend to live in either of the properties permanently. HMRC also argued that there was no evidence of continuity. Fortunately, the tribunal found in favour of Mr Clarke on this point.
HMRC will no doubt state that each case is based on its particular facts. However, the Clarke case suggests that PPR relief may be available after relatively short periods of ownership and occupation. Clear evidence of occupation and intention to reside at the dwelling house permanently should be gathered and retained, particularly in borderline cases.
This article is accredited to Mark McLaughlin for the ICPA
Mark McLaughlin CTA (Fellow) ATT TEP