Main residence relief is a well known and potentially valuable relief from capital gains tax (CGT). In general terms, the relief may be available when an individual sells or gives away a dwelling which has been his only or main residence. If the dwelling has been his only or main residence throughout his ownership, or for all but the last three years (or less) of his ownership, full relief will be available, provided other conditions are met.
An individual who owns two or more “residences” may be able (within a time limit) to nominate one of them as his main residence for the purposes of the relief. Even if that nomination is in effect for only a short period and then varied in favour of another residence, the relief may be secured in relation to the last three years of ownership. Short term nominations to secure relief on the last three years of ownership were encouraged by HMRC’s own guidance but, partly because of their use by certain Members of Parliament, have now become notorious as “flipping”.
The main residence relief itself, and the availability of a nomination, both depend on an individual establishing “residence” at the property or properties. What degree and quality of occupation, and what evidence, is necessary to establish residence? This question was considered in four recent cases decided against the taxpayer by the First Tier Tax Tribunal. In each case the periods of ownership and alleged occupation were short.
In Metcalfe v RCC, the flat in question was owned for less than six months. The Tribunal found that Mr Metcalfe’s written and oral evidence fell short of establishing that he had ever resided at the flat. It found the electricity bill improbably small for the winter months and did not accept Mr Metcalfe’s explanation for this. The Tribunal did not accept that Mr Metcalfe had provided evidence to show that his occupation of the flat had any degree of permanence. Indeed, the Tribunal found evidence to the contrary: Mr Metcalfe had not notified his change of address to his bank or the Council, and within a few weeks of acquiring the property had obtained a valuation with a view to selling it.
In Favell v HMRC the Tribunal found that Mr Favell had not produced satisfactory documentary evidence (such as bills, bank statements, correspondence etc.) to show that he had occupied a flat, and so had failed to discharge the burden of proof that it had been his only or main residence. Similar conclusions were reached in the case of Springthorpe v RCC, in which Mr Springthorpe contended that a house had been his main residence between November 1999 and July 2000. The Tribunal observed that the electricity bills had been minimal, there had been no cooking facility, and “the gas had been switched off until March 2000 with the result that there was no hot water available for washing”. The Tribunal found that, to the extent that Mr Springthorpe occupied the house, “he did so for the purpose of renovating the property rather than occupying it as his home which he expected to occupy with some degree of continuity”.
In Moore v RCC, it was accepted that Mr Moore had occupied the property, albeit for just three to four months, but he lacked the necessary intention to occupy it as his main residence. The Tribunal heard that Mr Moore and his wife (then his girlfriend, Miss Archer) had acquired the property in December 1999. The property required renovation, but Mr Moore said that the intention was that it would become their home. He said that Miss Archer refused to move in because of unruly neighbours. Mr Moore carried out the renovations and ultimately the property was let to tenants. He claimed that he lived in the property for approximately three months, although he admitted that in that period he had paid no Council tax, had no documentary evidence (such as receipts for water rates, home insurance, telephone bills, DVLA records or credit reference agency records) to show his residence, and had no furniture there apart from a bed and cooker. The Tribunal did not accept Mr Moore’s evidence that he had lived in the property in the relevant period, finding that evidence unreliable on crucial issues. The Tribunal found that the purpose of the acquisition was for improvement and then rental gain, and that Mr Moore was at all times committed to his relationship with Miss Archer, who did not at any time intend to live at the property. Surprisingly, given the weakness of his apparent case, Mr Moore has appealed to the Upper Tribunal.
In each of these cases the taxpayer’s contentions were relatively weak, but useful lessons can be learnt even by taxpayers who consider their position to be much stronger. First, while in some circumstances the taxpayer may not actually have to claim the relief or include the disposal and gain in his tax return, there is always the possibility that HMRC may later challenge the position and, in particular, may attack the factual basis on which the taxpayer says that the property was his main or only residence. In such a scenario the taxpayer’s ability to produce evidence, especially objective documentary evidence, will be crucial to success. Thus, it may turn out to be important to have notified third parties of a change of address.
Second, taxpayers should not assume that mere occupation, particularly of a limited kind, will amount to residence for the purposes of the relief. Occupation of a fully furnished and continuously available country home on, say, two or three weekends a month throughout the year, plus some weeks of holiday and other special family occasions, might perhaps safely support a claim that it is a residence, but there will be many cases where the degree and quality of the occupation fall short of this.
The Treasury announced in November last year that the Office of Tax Simplification (“OTS”) had undertaken a review of all tax reliefs, allowances and exemptions, for businesses and individuals, covering all the taxes administered by HMRC. The OTS would report to the Chancellor of the Exchequer before the 2011 Budget, now scheduled for 23rd March. In an interim report published in December 2010 the OTS included main residence relief in a group of reliefs which it had reviewed to test its methodology, and made some comments without indicating final recommendations or conclusions. The OTS recognised a continuing rationale for the relief, but suggested that some changes to its conditions may be desirable and, in particular, that the operation of the three-year rule, which it said encourages the practice of “flipping”, should be reviewed. It would not be surprising if some changes were introduced with effect from the Budget.