In the case of Dr Susan IIes & Dr Dimitris Kaltsas (‘the appellants’) (TC03565, published on 16 May 2014), the First-tier tribunal could not support the appellant’s argument that occupation of a property for 25 days qualified as a residence for the purposes of CGT principal private residence relief (PPR).
Although the appellants did not reside in any other property during the 25 day period, HMRC did not accept that residence at Flat 202 Pierpoint Buildings, 16 Westferry Road, E14, qualified for relief under s222 and s223 TCGA 1992 and amended the self-assessment returns accordingly. Citing the case of Goodwin v Curtis  BTC 176, CA, where the taxpayer was found to have used the house as a stop-gap, the FTT held that the appellants did not ‘reside’ in the flat within the meaning of legislation.
Ultimately the appeals against HMRC’s amendments failed as the quality of the appellants’ occupation of the property did not have a sufficient degree of permanence, continuity or expectation of continuity to justify describing that occupation as ‘residence’.
The facts of the case
The appellants were a married couple and they had three children aged 20, 18 and 14. The eldest daughter was part way through a degree at Exeter, while the 18 year old was about to start at Oxford University. In relation to the property interests the facts, which were not in dispute were as follows:
- At the time the flat at Pierpoint Buildings was acquired in April 1999, the family resided at 74 High Road, Chigwell, Essex. The house had five bedrooms, three bathrooms and four reception rooms;
- The family home had been acquired in 1998 with the help of a £800,000 mortgage which could be afforded because of Dr Kaltsas’ (DK) income from his private practice;
- The flat was acquired for £260,500 with a 95% mortgage, initially as an investment, let to tenants;
- Due to financial difficulties, the family home was put on the market in early 2007, but a buyer was not found until a year later when contracts were exchanged on 31 March 2008 and the sale completed on 1 July 2008;
- The flat was advertised for sale in December 2007 and an offer accepted in January 2008;
- The tenants vacated the flat at the end of June 2008 and the family moved into the flat on 1 July 2008 having continued to live at the family home until that date. The flat was 12 miles from Dr IIes (DI) practice;
- The appellants workplaces were notified of the change of address, but they did not notify other institutions;
- Contracts on the flat were exchanged on 9 July 2008 and the sale completed on 25 July 2008 at which point the family moved to 41 Woodside Road, Woodford Green, a four bedroomed house, one mile from DI’s practice and close to the son’s school, which they had viewed before moving into the flat. It was ‘still available’ when they moved out of the flat;
- The family subsequently moved to 17 Monkhams Drive, a five bedroomed house again only one mile from DI’s practice.
During the hearing DK represented himself and his wife, who was not present, and outlined his case.
During the period 2000 to 2004, DK found himself having to defend himself against allegations made towards his practice which lead him being suspended from his NHS post and suspension from the General Medical Council meaning he could not practice privately. Although he was subsequently exonerated the suspension caused huge financial problems where it was evident the bank would repossess 74 High Road. DK explained that his intention was to sell 74 High Road to clear the debt and move into the flat.
The flat was however put onto the market in the same year and DK’s intention was to use the sale proceeds to stave off the bank allowing them to possibly save their home.
The appellants gave the tenants one month’s notice to vacate the flat in March 2008 once the offer on 74 High Road had been accepted and it was their intention to move into the flat in April 2008, but the tenants were very obstructive and did not move out until July 2008.
DK explained that the purchaser of the flat had disappeared and they had doubts the sale would go through. The first they knew that the contract had been exchanged on the flat was 9 July 2008. In the interim, they did not want to take it off the market due to the fragility of the market and that they could not be sure the house sale would be completed.
DK made it clear that it was their plan to always stay in the flat and he explained how a family of five were going to live in a two bedroomed flat. With one child at university and another about to start he expected less congestion in the flat.
The family home eventually sold at a profit, after paying off the mortgage, of around £900,000. Despite this the flat was also sold leaving a profit of approximately £130,000. DK told the FTT that “although our intentions were always to stay in the flat, we were forced by events and not by choice to move out of the flat. Things moved in a very odd way.” Asked why declaring such reluctance to move out of the flat they preceded with the sale, DK said that the sale would help to stabilise them financially at a time when the housing market was dead.
HMRC did not accept DK’s evidence that they did not know when they moved into the flat, that exchange of contracts of its sale was imminent. When asked whether he had solid confirmation before the house sale completed that the sale of the flat would go through, DK did not answer. HMRC found this initial lack of answer as an indication that DK was not sure what the truth was.
Leaving that aside, HMRC believed that if the appellants had intended to reside in the flat indefinitely it is reasonable to assume they would have withdrawn the flat from sale.
HMRC pointed out a number of inconsistencies in DK’s account the pertinent points of which were as follows:
- In view of the profit made on the sale of the family home which cleared their debts, HMRC believed there was no financial necessity for the family to move into the flat. This was supported by the ‘statement of case’ where no mention of financial difficulties had been mentioned. This only came to light during the hearing and HMRC found it unlikely such a fundamental point would have been overlooked;
- The original statement made by DK was that the flat was taken off the market until the house sale had been completed. This was clearly not the case;
- The fact that the family had nowhere else to go but to reside in the flat once the family home had been sold was not accepted. They had already viewed 41 Woodside (a much more suitable property) which was ‘still available’ when they moved out of the flat, which suggests it was available before they moved into the flat;
- Preventing the flat sitting empty was not a reason why the appellants moved into it. They could have easily let the tenants remain in occupation;
- Despite DK’s account, all three children would potentially be at home during university holidays. A bedroom containing bunk beds and other bed is not suitable accommodation for two young women and a teenage boy;
- It was also felt that the location of the flat in term of the working practice and the son’s school made the flat unsuitable.
In conclusion, HMRC found that financial difficulty, having nowhere to go, preventing the flat sitting empty and suitability to the family’s needs were not reasons why the appellants moved into the flat. They believed that the appellants dealt with pre-exchange documents for the flat sale before moving into it and therefore they knew their occupation of the flat was temporary, supported by the fact that only the workplaces were notified of change of address.
The FTT agreed with HMRC stating, as in Goodwin, the flat was unsuited to the appellants’ needs. They found that the quality of occupation in this case had even less permanence, continuity or expectation of continuity than in Goodwin. They did not reside in the flat within the meaning of s222 and s223 TCGA.
Why is this important
This case highlights once again the importance of establishing clear evidence that a property is suitable to be used and will be used as a permanent home and not merely as a temporary stop-gap. The unsuitability of the flat and the fact that it was not taken off the market were important factors. The inconsistencies in the appellants account were also unhelpful so it once again underlines the importance of taking upfront advice and being represented in such hearings.
Practitioners dealing with PPR cases especially involving situations of short term occupation will be interested in this case.