Tax Planning Around Residential Property - Ppr And Letting
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7 June 2011
Most family farms and
landed estates contain a number of houses, cottages and converted farm
buildings. It is quite a normal occurrence for members of the family to
from property to property or to be forced to sell residencies to help
finances or to pass property to the next generation to help with the
inheritance tax (IHT) burden that might await.
Such transfers and
disposals can give rise to Capital Gains Tax (CGT) liabilities. Many
families turn to the “principal private residence” relief (PPR) to help
mitigate the CGT liability. It is tempting for those trying to “wash
potential CGT liability with PPR to stretch the rules with regard to
“permanence” and evidence of occupation.
Two recent cases – Moore
and Metcalfe have highlighted the
need to be
careful regarding the need to keep within the PPR legislation and
there is a genuine change of residence to ensure that this is
the “three year” (or 36 month) rule and letting relief there can be
planning placed around short stays.
of Permanence – quality of contemporaneous evidence
It might seem obvious
to many that to achieve a PPR qualification there must be both intent
AND a degree of permanence but these principles were recently tested in
courts. The cases are of particular relevance to the farming community
residence around the farming estate, and also at a generic level to all
who own more than one property.
There are many in the
tax industry who report that the number of tax “enquiries” have reduced
subject for which HMRC seem to have a huge appetite for is detecting
debating apparent PPR abuse.
Moore – the need for quality evidence
Terrence Moore v HMRC TC710)
Mr Moore and his
partner Miss A (now Mrs Moore) bought a house in 1999 with the
intention of renovating
it and living in it. Moore
was a plasterer and decorator and his father was a builder. Soon after
the works, Mr Moore and Miss A found that the neighbours were
live near. As a result of these conditions Miss A changed her mind and
to consider moving to live in the property. Mr and Mrs Moore then
jointly to let it out. The property was let until its disposal in 2004.
Mr Moore argued that only
he was living at the property as his residence during the period from
completion of the works for about three months and that the property
was, as a
result of this, his PPR and qualified for PPR relief for three years
months of the ownership period, i.e. the three months occupation and
years after leaving the property that is allowed under the TCGA 1992,
relief” (see below) covering the remainder of any gain. Mr Moore
he had no documents to use as evidence. Mr Moore said that had he not
advised to keep any such documents and had not done so, and stressed
years had elapsed before HMRC opened their enquiry in 2007, and ten
elapsed before the hearing took place. This clearly highlights the need
retain documentary evidence and to update important records relating to
residence in a timely manner.
The decision of the
Tribunal was that Mr Moore could not produce any supporting evidence
claims that he planned to live in the property as his PPR. The
the evidence was that he occupied the property only to renovate it to a
condition suitable for rental. Evidence was presented by HMRC that Mr
repeated the scenario in another property three years later. The
agreed with HMRC that Mr Moore’s occupation of the property ‘did not
have the ‘quality
that turned mere occupation of it into its being his residence.’
The Tribunal stated
that Mr Moore’s evidence was ‘unreliable, vague and sometimes
Moore’s appeal was dismissed. The case highlights the important point
of the need
of evidence to claim PPR and the need to prepare for a first tier
tribunal in a
strong manner on the part of both the client and the adviser. For
planning to claim PPR on farm property they reside in for a short
evidence must be retained. Obviously the strongest argument is the true
Metcalfe – establish place of residence
Metcalfe v HMRC TC753, 15 October 2010)
Mr Metcalfe claimed
to have moved into an apartment around November 2002, having acquired
the previous month. The property came with carpets, fridge/ freezer,
washing machine, and Mr Metcalfe had purchased a bed. Mr Metcalfe did
install a landline telephone at the property as he had the use of the
at his place of work and used a personal mobile telephone. A credit
application in December 2002 was made from another address. An
had been provided by Mr Metcalfe, which showed a low level of
over the winter months; Mr Metcalfe argued that the apartment was very
had double glazing, and he worked long shifts.
Mr Metcalfe stated
that his partner had moved in with him but after a short amount of time
moved out as she did not enjoy living in York
and also the distance from her family was too far to travel. Mr
the property in March 2003. Mr Metcalfe insisted that he had bought the
apartment with the intention of living there permanently. However,
partner left the property and he returned to work in Leeds,
he changed his mind. Mr Metcalfe explained that he had made a number of
‘technical errors’ by failing to notify his bank and the council of a
address and stated that he had mistakenly assumed he would receive a
tax bill for his new premises in due course.
Without any other
documentary evidence provided by Mr Metcalfe, HMRC argued that Metcalfe
established the property as his place of residence.
The Tribunal judges
assessed the understanding of residence with regard to the quality of
occupation of the apartment, balancing the degree of permanence,
expectation of continuity of that occupation. The Tribunal found as a
Mr Metcalfe’s written and oral evidence fell short of establishing that
in fact ever resided at the apartment. The Tribunal was satisfied that
had, for a time, occupied the apartment as his dwelling house. The
not accept that Mr Metcalfe had provided any evidence to show that the
occupation had any degree of permanence and that it amounted to
taxpayer appeal was dismissed.
Where a property has
only been a principal private residence for part of the period of
for another part has been let out then “letting relief” is available.
Letting relief is
mentioned in the Moore
case and the relief is of help with
complex farm property CGT calculations where there are different PPR
An example is where a
taxpayer moves out of a property that has been his only or main
residence for a
number of years and lets the property before disposing of it at some
the future. This may be longer than the three years allowed under the
months rule mentioned in the Moore
hence an apportionment would be needed to arrive at the taxable gain.
223(4) TCGA 1992 offers relief to the taxpayer. To qualify, the
part of the property) must have been occupied as the owner’s only or
residence at some point during the period of ownership and must be let
The amount of the relief
is the lowest of:
- The amount of private residence relief given by
TCGA 1992, s. 223 (1) to (3); or
- (for disposals from 19 March 1991) £40,000; or
- The amount of the chargeable gain arising
because of the letting.
The maximum relief is
applied to each disposal that attracts private residence relief. For a
this could mean relief of two times £40,000, i.e. £80,000.
Residences – the importance of the nomination/election
Where an individual
owns more than one home, he may, within two years of acquiring a
which is to be his main residence and hence be covered by PPR for CGT.
made, the election may be varied at any time from a date that may be up
years before the date of the second nomination. If such a nomination
been made, then the question of which home is the main residence will
decided on the facts. In any event, once a nomination has been made the
three years of ownership will qualify under the 36-month rules
earlier and there are CGT planning opportunities around this. HMRC have
amount of guidance on the subject in their manuals.
of Residence – meeting HMRC requirements
The following are
points HMRC have been known to look at with regard to proof of
- At which residence is the individual registered
to vote and how is it furnished?
- Where does the family (if any) spend its time?
- If the individual has children, where do they
go to school?
- Where is the individual’s place of work and
where are they registered with a doctor/dentist?
- Which address is used for correspondence?
- Banks and building societies
- Credit cards
- Car registration
- Which address is the main residence for council
PPR is a very
effective tax relief to help mitigate CGT liabilities especially with
current rate of 28% and combined with letting relief the 36 month rule
second property election it is important for farming families and
with more than one residence to help plan who lives where and for how
long tax efficiently.
As these recent Tribunal cases show, HMRC do not take kindly to any
apparent abuse of the relief and they are experienced at asking the
questions in their desire to test the degree of permanence…make sure
answers to the questions are available through documents being kept.
About the Author
Supplied by Julie
Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire,
01962 735544. Email;
Julie Butler F.C.A. is the author of Tax
Farm and Land Diversification of
which the 3rd edition is to be
published shortly (Bloomsbury
Professional), Equine Tax Planning ISBN:
0406966540, and the forthcoming
Stanley: Taxation of Farmers and
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Article Published/Sorted/Amended on Scopulus 2011-07-01 09:48:36 in Tax Articles