Posted by James Pearson on 04 Oct 2013
Main Residence Exemption: An Update on Recent Court Cases
Individuals selling their only or main residence (“Principal Private Residence”) do not normally have to pay Capital Gains Tax (CGT) on any gain they make, provided the property has been occupied as their main/only residence throughout the period they have owned it.
If for part of the period of ownership the property was not the individual’s main/only residence, a corresponding portion of the gain may not be exempt and therefore some CGT could be payable. However, where the property has at some point been occupied as an individual’s main/only residence, even in periods when they are absent from it (including the final 36 months of ownership) they may still be deemed to have occupied the property and be eligible for tax exemption.
Therefore, for CGT purposes it can be highly advantageous for a property to be considered your main residence, and over the years there have been various court cases involving taxpayers and HM Revenue & Customs (HMRC) concerning this matter.
In the past court cases have tended to consider whether a property represented the taxpayer’s main or secondary residence, but recent cases look more fundamentally at whether the property represents a “residence” at all.
As a starting point, in the case of Fox v Stirk (1970) Lord Widgery concluded that “residence implies a degree of permanence. Consequently, a person is not entitled to claim to be resident merely because he pays a short temporary visit”.
Goodwin v Curtis
In Goodwin v Curtis (1998) the Court of Appeal found against the taxpayer, determining that the property represented temporary rather than permanent accommodation. Here the taxpayer, who had just separated from his wife, only lived in the property for five weeks and within two days of moving in he had purchased another property which he intended to live in as his main residence.
Susan Bradley v HMRC
In Susan Bradley v HMRC (2013) the first tier tribunal also found in favour of HMRC. However, this was more surprising as although there were similarities with Goodwin v Curtis, in that Mrs Bradley had separated from her husband and moved into another property she owned, her occupation of the property appeared to have both greater quality and quantity to it. Mrs Bradley lived in the property for eight months before reconciling with her husband and returning to the marital home, and although she put the property up for sale, because the market was poor she expected to live there permanently.
David Morgan v HMRC
Following Susan Bradley’s case, in David Morgan v HMRC (2013) the tribunal found in favour of Mr Morgan. Mr Morgan was engaged to his girlfriend and in the process of purchasing a flat for them to live in when they were married. Mr Morgan split up with his girlfriend but proceeded with the purchase of the flat, and although he only moved into the flat for two weeks, specifically to prepare it for renting, the tribunal found in his favour. Key to the tribunal’s decision was the fact that his former fiance’s name appeared on the mortgage deed as a future resident, meaning that notwithstanding the short period he actually lived in the property, he had intended to occupy it as a residence.
Piers Moore v HMRC
Most recently, in Piers Moore v HMRC (2013) despite living in the property between November 2006 and July 2007 after separating from his wife, the tribunal found in favour of HMRC. In Mr Moore’s case, although he moved belongings into the property and did not start marketing it until some months after moving in, unfortunately he informed HMRC in writing that he did not choose to “make [the property] my permanent address because it only had two bedrooms” and “I started to look for another property in January 2007”, despite subsequently informing HMRC that he began looking for another property in March 2007.
In summary, although the facts in some of the above cases were finely balanced, there appears to be a definite trend towards HMRC challenging certain exemption claims made in Tax Returns and taking disputes to the courts for a decision where agreement cannot be reached.
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