In the recent case of Susan Bradley ( UKFTT 131 (TC) published on 5 March 2013), the First-tier Tribunal found in favour of HMRC and rejected Mrs Bradley’s appeal that the disposal of property in which she had lived, following her separation from her husband, was eligible for principle private residence exemption (“PPR”).
The case highlights the importance of establishing at the outset that a property is to be used as a permanent residence rather than merely temporary accommodation and shows that where there is doubt HMRC are quite prepared to challenge claims.
Until April 2007, Susan Bradley (“SB”) had lived with her husband at 118 Ashley Road, a jointly owned property. In addition, SB owned a house at 124 Exning Road and a bedsit flat at 68 Western Way both of which were normally let to tenants.
Following a breakdown in the marriage, SB left Ashley Road in August 2007 and moved into the flat at Western Way which was vacant at that time. When the tenancy of Exning Road ended in April 2008, SB moved from the flat into that property.
The Exning Road property needed repair and re-decoration which SB undertook including improvements to the kitchen, making it more a “home”. At the same time, despite her intentions to remain at Exning Road permanently, SB gave instructions to the local estate agents to put the property on the market where it remained until it was sold.
SB’s view had been that the separation from her husband would be permanent and that she intended to seek divorce. She remained on civil terms with her husband and visited Ashley Road regularly to pick up her post. SB did not take steps to severe the joint bank account or change the address on her own bank accounts in which she held her own income, or the utility bills relating to the properties. She did however claim single occupier relief for council tax first on the flat and then in respect of Exning Road.
In November 2008, SB moved back to Ashley Road having reconciled with her husband. The property at Exning Road was subsequently sold in January 2009. SB claimed PPR exemption in respect of the resulting gain on the basis that the property had been her only or main residence during the period April to November 2008. HMRC rejected the claim.
The relevant legislation at s222 TCGA 1992 states that spouses can only claim to have one main residence on which PPR can be claimed so long as they are living together. SB and her husband had permanently separated and were not living together and SB was therefore able to claim PPR in respect of another residence.
The FTT were satisfied that SB had intended to permanently separate from her husband; however, this on its own was not enough to secure PPR exemption in respect of the sale of Exning Road. There was also a need to demonstrate that the property had been her main residence.
The word ‘residence’ is not defined in the legislation so it must take its ordinary meaning. The view expressed in HMRC’s manuals is that for an individual this means a dwelling in which a person habitually lives.
The FTT referred to the leading case on the meaning of residence [Goodwin v Curtis (1998) TC 478] in which it was mentioned that temporary occupation at an address does not make the property a main residence. The judge went onto say in respect of the PPR claim that
“in order to qualify for relief a taxpayer must provide some evidence that his continuity in the property showed some degree of permanence, some degree of continuity or some expectation of continuity”
Taking into account the length, quality and circumstances of SB’s occupation of Exning Road, the FTT found that SB did not occupy the property as her residence; it was only ever meant to be a temporary occupation. The fact that the property remained on the market throughout the period she occupied it and would in their opinion have been sold if a suitable offer had been received was a major factor in reaching their decision (supported by the FTT decision in Metcalf v HMRC  UKFTT 495(TC), a case in which a newly acquired property had been put on the market). The FTT thus held that PPR exemption was not due in respect of the sale of Exning Road.
Why this decision is important
This case is one of a series of recent decisions involving PPR which indicate that HMRC are now taking a much tougher line, and are quite prepared to challenge what they perceive as contentious claims. It underlines the importance placed on practitioners when discussing potential claims with clients and, particularly, the need to gather all the facts regarding the quality, length, nature and circumstances surrounding the occupation of a property to establish its status as a residence or main residence. This is even more crucial in situations where a property has been used as a residence for only a short period.
In this case, perhaps if SB had not put the property on the market while she occupied it and had taken steps to show this was now her permanent home by notifying the change of address, the claim might have had more chance of success.