PPR Win – HMRC Beaten in two cases
The First-tier Tribunal has heard two cases dealing with the availability of main residence exemption on two adjacent properties in Hove. These concerned John and Sylvia Regan (TC02246) and their son Daniel Regan (TC02247) and the decisions were published on 27 September.
Briefly, the facts regarding Daniel Regan were as follows:
In 1994 Daniel Regan bought 95 Rowan Avenue. A club owned by his parents was located behind the property, and Daniel spent a year renovating the premises before the club opened in October 1995. Shortly after that, the club’s entertainment manager, Mr Hudson, moved into 95 Rowan Avenue with his wife, however Daniel also continued to live there until April 1998 when he moved into a house he had bought with his girlfriend. Prior to moving out he had also spent time at his parents’ house and at his girlfriend’s flat, where he kept some of his possessions. He did not sell 95 Rowan Avenue immediately because Mr and Mrs Hudson continued to live there; however, Daniel eventually sold the property to his parents in May 2000.
HMRC contended that 95 Rowan Avenue had not been Daniel’s main residence, citing a number of factors:
- HMRC stated that correspondence and tax returns had been sent to his parents’ home. Although this was found to be incorrect, and was therefore rejected by the tribunal, it demonstrates the importance of verifying such information.
- Daniel was not on the electoral register at 95 Rowan Avenue (although Mr and Mrs Hudson were), although he was shown at his parents’ address and then at the house he bought with his girlfriend. The tribunal decided that the details on the electoral register at the property were irrelevant to the question of whether Daniel was living there.
- Daniel did not have any credit arrangements showing 95 Rowan Avenue as his address. However, he said that he did not have any credit arrangements while he was living at the property, and the tribunal decided that the absence of credit arrangements is not evidence of him not living at this address.
- Daniel used a date stamp belonging to the club on his private correspondence in 1997, which HMRC took as evidence that he did not live at 95 Rowan Avenue. He said that this was because he opened his correspondence there, and the tribunal accepted that this was the reason for the date stamp. Furthermore, this was not relevant as the date fell within the last three years of ownership.
HMRC also asserted that Daniel had been negligent in not including the disposal on his tax return, but the tribunal took the view that he had not failed to take proper care if it is correct to regard 95 Rowan Avenue as his main residence.
The facts regarding Mr and Mrs Regan were as follows:
Mr and Mrs Regan lived at 91 Surrenden Road until it was sold in August 1999. After that they lived with friends until they bought 95 Rowan Avenue from their son in May 2000. They lived in 95 Rowan Avenue until June 2003. In September 2002 they bought another property at 7 Woodland Drive, but this property was uninhabitable and they spent the next two years renovating it. In February 2003, they got planning consent to redevelop the club behind 95 Rowan Avenue. 95 Rowan Avenue would be demolished to provide access. In the same month, they bought 93 Rowan Avenue, which they modernised while still living at number 95. They moved in to number 93 in June 2003 and lived there until April 2004, when they moved in to 7 Woodland Drive. After they moved out they built an extension to number 93, and in August 2006 they sold that property.
HMRC contended that the disposal of 93 Rowan Avenue was a trading transaction and the profit was subject to income tax. Alternatively, if it was a capital gains tax transaction, they argued that it was not covered by PPR relief.
The tribunal looked at the application of the badges of trade.
- Subject matter of the realisation – the tribunal agreed with HMRC that this is not a determining factor as land can be held as stock or as an investment.
- Period of ownership – the period of ownership or occupation of the property is not indicative of trading or otherwise.
- Frequency of similar transactions – HMRC viewed the fact that Mr Regan was a builder, and the fact that number 95 was demolished as part of a development, as indicative of trading. However, the tribunal did not see that the number and frequency of transactions was indicative of trading. Moreover, the tribunal accepted that number 93 was bought because Mr and Mrs Regan needed somewhere to live.
- Supplementary work carried out at the property – HMRC considered that the construction of an extension at the property was beyond what a private owner would do. However, the tribunal concluded that the question is not whether the work is more than would be expected from a private owner, but whether the activity was consistent with a trade. The tribunal’s view was that this badge was met, but that this is not surprising given that Mr Regan is a builder.
- The circumstances indicate a trading motive – HMRC highlighted that most of the work was done while Mr and Mrs Regan were not in the property. However, the tribunal returned to the fact that they needed somewhere to live, and that this was the motive for acquiring the property.
The tribunal decided that, on balance, the transaction was not a trading transaction. In considering the tribunal’s decision it is interesting to note that the fact that Mr Regan was a builder seemed to have been seen as less crucial than HMRC had suggested, and that when considering the badges of trade the wider motive should be kept in mind. The tribunal accepted Mr and Mrs Regan’s explanation that they bought the property because they needed somewhere to live.
The tribunal then considered whether PPR relief was available, and in particular whether the property ever became a residence of Mr and Mrs Regan. HMRC submitted that the meaning of residence is the dwelling in which a person habitually lives, following Frost v Feltham (1981 STC 115).
Furthermore, they emphasise that there must be a degree of permanence or continuity, following Goodwin v Curtis (1998 STC 475). However, the tribunal took the view that permanence or continuity should not be overstated, and that, following Moore v Thompson (1986 STC 170), an occasional or short residence in a place can make it a residence, but that the important question was one of fact and degree, i.e. the quality and not merely the length of the occupation.
The tribunal found that Mr and Mrs Regan’s occupation of the property was more than a stop gap or a temporary place of occupation, and that PPR relief was available on the disposal.
These decisions in both these cases turned heavily on the facts; however, they demonstrate the importance of looking objectively at the motives for acquiring the property, and of assessing all the circumstances without putting a disproportionate emphasis on individual factors such as that Mr Regan was a builder. The cases also show that it is important to examine carefully the evidence put forward by HMRC, as it may either be untrue (the address for correspondence) or irrelevant (the date stamp used by Daniel).