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I am not aware of a minimum residence period necessary to enable a property to qualify for principal private residence relief. The following scenario has been suggested to me: a man owns a house and a property which is let as two flats. He moves out of his house and into one of the flats, and makes a formal election for that flat to be his principal private residence. He then moves back into his house and elects once more for the house to be his principal private residence. Later, he does the same thing with regard to the second flat.
I am not aware of a minimum residence period necessary to enable a property to qualify for principal private residence relief. The following scenario has been suggested to me: a man owns a house and a property which is let as two flats. He moves out of his house and into one of the flats, and makes a formal election for that flat to be his principal private residence. He then moves back into his house and elects once more for the house to be his principal private residence. Later, he does the same thing with regard to the second flat. It is now suggested that the two flats will each be subject to the £40,000 residential letting exemption when they are sold.
Do readers perceive any problems with this?
(Query T16,023) - NW.
A number of different propositions need to be distinguished in this type of scenario.
Central to relief is the concept of 'residence', without which the entitlement to relief does not come into play at all. In Goodwin v Curtis [1996] STC 1146, Mr Justice Vinelott upheld a General Commissioners' determination that a property professional who had had to live in a property he had purchased for a short period following matrimonial difficulties did not qualify because the quality of his occupation did not have the necessary degree of permanence or expectation of continuity. It follows from this that 'flat sitting' in series, even if the other two properties have been let concurrently, will not suffice to bring the flats, which were let at the outset, to the starting gate. It is necessary for there to be a material period of genuine occupation. As will be seen below, this will have to be at least six months if the other properties are to be let in a form which will not generate protection for the tenant.
Once a flat is within the scope of the relief by having qualified at some stage, section 223(4), Taxation of Chargeable Gains Act 1992 does indeed appear to provide a possible additional £40,000 of relief, even though the period of letting took place before the first period of residence started.
Section 223(3)(a) provides that periods of absence of up to three years may be ignored. This means that it will be possible to avoid loss of main residence relief on the house under this head provided that, while residence is being acquired in one or other of the flats, the house is let. It is possible to do so without creating protection by an assured shorthold tenancy, provided that the minimum period of the letting is six months. It needs to be borne in mind, however, that it may be necessary to replace those pieces of furniture in the house which are not of the necessary fire-resistant quality before letting.
Against this background, the possibility of electing under section 222(5)(a), Taxation of Chargeable gains Act 1992 will take second place. This provision should not, however, be ignored because, provided that the initial election is made within two years of the start of the period of residential overlap, it is possible to vary it backwards by up to two years, for instance just before the sale of one of the properties. (Despite the example in the Revenue's Capital Gains Manual at paragraph CG64511, it would be inadvisable to leave this until after sale in the light of Mr Justice Vinelott's reluctance to endorse that possibility in Griffin v Craig Harvey [1994] STC 54.) Such a variation would, however, have to be directed to a date at which a multiple residential scenario existed. But, unless very short term, such a state of affairs is unlikely to be helpful in demonstrating the necessary degree of permanence required by Goodwin v Curtis.
Finally, once a property has qualified, section 223(1) treats the last three years of ownership as residential in any event for the purposes of the time apportionment calculation under section 223(2). Although the statutory wording suggests that a period of ownership dating from before the first period of residence may be taken into account for this purpose, and Somerset House withdrew their specific instructions to Inspectors to challenge this some years ago, it is possible that the courts, by applying purposive construction methods, may be disposed to interpret the three-year period as not being capable of starting before the first period of residence has commenced. This factor supports the conclusion to be drawn from Goodwin v Curtis that a quick 'residence followed by sale' policy for the two flats is likely to be undesirable.
It follows that successive periods of at least six months' occupation of the flats, coupled with assured shortholds of the other two properties, followed by two years' reletting of each flat before sale, seems the wisest course of action. - Zibultong.
'NW's' belief that there is no minimum period of ownership required for residence to be determined is confirmed at paragraph CG64441 of the Inland Revenue's Capital Gains Manual. It is made clear that the test is one of quality, rather than quantity, of occupation.
At paragraph CG64456, three principles to determine residence as enunciated by Lord Denning, Master of the Rolls, in the case of Ricketts v Registration Officer for the City of Cambridge 3 All ER 7 are reproduced. First, a person can have two residences. Secondly, temporary presence at an address does not constitute residence. Finally a temporary absence from the property on holiday or in hospital does not preclude residence.
Given the brief facts supplied, much of the response must involve asking questions and setting out the conclusions that would follow on.
Are the current residence and the rented properties nearby? If not, it is more likely that the client would have to move out of the current residence and move in to the flat in order to establish residence. This should prevent the Inland Revenue from arguing that, in reality, the taxpayer has not moved out of the current residence and that the flat is empty apart from occasional visits.
The next question is what family does the client have? Does he have a wife or partner who has a job? Does he have children who are settled at school? If so, then a move to a new area, where the properties are a good distance apart, becomes less likely. However, if such ties have been uprooted, it gives a greater impression that the flat is a residence.
If the current residence and the flats are close by, would his family move to the flat? In fact is the flat big enough for his family? If not, it gives the impression that the family residence has not changed and that occupation of the flat is no more than a temporary presence as per the second principle of Lord Denning.
Some factors could improve the chance of arguing that the flats are residences. The client should register as a voter at the flats. All post should be redirected to the flat. It would also be advisable to have a telephone line in his name and a TV licence for that address. If possible, the current residence could be made unavailable by renting it out.
Thinking about this scenario, I would also prefer it, if circumstances would allow it, for the client to move directly from one flat to the other. Having an interim period during which the client returns to the current residence increases the sense of artificiality. In such a case, why would the client have decided to move to one of the flats, but then chosen to move back to the current residence? Why would he then choose to go back to live in the flat next door? It does not make sense.
On the question of the availability of the letting exemption, the answer is yes and no. Yes, an exemption will be given because this applies if a dwelling house that has been a principal private residence is sold and that property has been let at any time in that person's period of ownership. No, the exemption may not be as much as £40,000. The amount of the exemption, as set out at section 223(4), Taxation of Chargeable Gains Act 1992, is the lower of the amount of the gain that is exempt by reason of actual or deemed occupation and £40,000. If the flats were sold within three years of occupation, then the numerator on the fraction would be three being the period of deemed occupation for the last three years of ownership. If the flats have been owned for 20 years, then 3/20 of the gain would be exempt and this figure is likely to be much less than £40,000.
A point to note is that if the client is married, it could be best to transfer the flats into joint ownership. Firstly, they would get an extra annual exemption on the disposal and, secondly, if the absolute deduction of £40,000 applies, each person would get the deduction, so doubling it up. - Hodgy.
Extracts from further replies received:
It is always difficult for a practitioner to be certain of principal private residence exemption being available for a property in anything but the most straightforward of cases. My advice to clients wishing to qualify for such exemption is to live in the property for as long as they possibly can. They must make sure that their bills are addressed to that property, including bank statements and other similar correspondence. It is also important to make sure that the Revenue is informed that the address is to be used for correspondence. One must also be practical. If the client works 200 miles away from the second property, it may be impractical for the client to use the property as his base for any length of time.
It is also inadvisable for the client to move into a second property at or around the time it is put up for sale, as it would be difficult to claim that his intention was anything other than trying to reduce his tax liability. - Little Bird.
Section 222(5), Taxation of Chargeable Gains Act 1992 provides for a selection as between two or more residences only 'so far as it is necessary'. This in turn requires a view as to whether a particular residence is or has become the only or main residence. The Inland Revenue's Tax Bulletin for August 1994, at pages 148 to 151, contains its interpretations, including a discussion of what constitutes reoccupation of a dwelling after a period of absence. Failure to reoccupy after absence abroad or for reasons of employment location could entail loss of an otherwise valuable relief.
The above Bulletin note says that a minimum period of reoccupation is not specified by law, nor does the Revenue attempt to impose one, looking instead to the quality of occupation rather than its duration. - Elder.
