Private residence relief – Quality not Quantity

In the First-tier Tribunal decision of Mr David Morgan (TC02596), which was published on 26 March 2013, it was held that Capital Gains Tax private residence relief was available even though the taxpayer had resided in the property for a short period.

Background

Mr Morgan and Miss Varley had been together for about five years and, in early 2001, they got engaged.  Miss Varley found a house which Mr Morgan bought with the aid of a mortgage, intending this to be their matrimonial home.  The cost of the property was £132,000.  They had intended that once they were married and living at the property, it would be transferred into joint names.  In anticipation of the move, Miss Varley had ordered white goods, which Mr Morgan’s parents paid for.

Mr Morgan had a flat which he sold, and then moved into Miss Varley’s mother’s house where Miss Varley was living at the time.  About two weeks before the purchase of the new property, Mr Morgan returned to Miss Varley’s home to find his belongings piled up on a bed with a note from Miss Varley ending the engagement with no explanation.

Mr Morgan moved his belongings to his parents’ home on 1 June 2001, before moving into the new property on 15 June when the purchase completed.  On 25 June, he requested a tenancy pack from Bradford & Bingley Building Society, and on 22 August 2001 he obtained permission to let the property.  The property was let from 31 August 2001 to 15 March 2006 when Mr Morgan moved back.  The property was sold on 28 July 2006 for £188,000.

The decision

The question to be decided was whether Mr Morgan was entitled to main residence exemption on the disposal of the property, and more particularly whether he took up residence in June 2001. In the FTT’s view the case was “extremely finely balanced”, and Mr Morgan’s case seems to have been helped by the fact that he was found him to be a credible witness.

For the FTT the key question was what was in Mr Morgan’s mind when he moved into the property in June 2001?  It was not disputed that he bought the house with the intention of making it his permanent home with Miss Varley.  However, HMRC took the view that because of the short period of time between moving in and renting out the property, and the fact that he only had limited furniture meant that he did not have sufficient quality of occupation for him to be able to claim relief from CGT on disposal.

The FTT decided that having limited furniture was not a relevant factor.  His parents had purchased white goods for the house, and he had his belongings from his old flat.  He was a young, single man, and would not be expected to have had an elaborately furnished house.

As to his intentions, the judges took the view that he needed only to show that at the time he moved into the property, it was his intention to make it his permanent residence, even if he changed his mind on the following day.  It is not the quality of occupation as such, but the intention of the occupier that matters. It is clear from Mr Morgan’s evidence that when he moved into the property he still hoped that Miss Varley would change her mind and move into the property with him. He only found out later that she had left him because she was seeing someone else.

Conclusion

Whether a property is a residence has always depended on the quality of occupation determined by examining such things as where correspondence is addressed, registration on the electoral role, use of utilities etc.  The difficulty will always be proving an intention from these factors, and the strong point in this case was the credibility of Mr Morgan as a witness.  In our view, the wider tests of quality of occupation will continue to be of relevance in answering the basic question whether a property can be regarded as a permanent residence.

It is also important to establish the intention at the time of moving into the property.  If Mr Morgan had decided to rent out the property before he moved in he would not have been able to claim main residence exemption.

If you would like further information in relation to main residence exemption please contact the TaxDesk on 0845 4900 509 and ask for Paul Howard.