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I think I am fairly familiar with the facility to make a principal private residence election under section 222(5), Taxation of Chargeable Gains Act 1992 where there are two houses. Clearly there are benefits of making such an election as, once made, it can be varied. On the other hand, if an election is not made within two years of acquiring the second property, no such election can be made and the question of residence would be determined by reference to the facts.
I have three points:
I think I am fairly familiar with the facility to make a principal private residence election under section 222(5), Taxation of Chargeable Gains Act 1992 where there are two houses. Clearly there are benefits of making such an election as, once made, it can be varied. On the other hand, if an election is not made within two years of acquiring the second property, no such election can be made and the question of residence would be determined by reference to the facts.
I have three points:
(1) A client of mine owns one house and a holiday let. He has decided to stop letting the holiday house and use it for his own residence. However, he has owned both these houses for well in excess of two years. Am I correct in saying that a residence election is now available as the holiday let only becomes a potential residence from the day on which it is no longer let out?
(2) When does a house become a residence? If it is not capable of being lived in because it is being renovated, I assume that it only becomes a residence on completion.
(3) In the absence of an election within the two-year time limit, the position is determined by reference to the facts in any given situation. This is at the behest of the Inland Revenue with a right of appeal to the Commissioners. Presumably, if one house is used more than the other, then this will be the principal private residence throughout the total period. On the other hand, if over the period it is clear that one house has been used as the principal private residence for half the period and the other house for the other half, would the allocation be on a 50:50 basis, or would the Revenue simply choose one house throughout the total period?
(Query T16,082) - Home from home.
The initial point to make in answer to the three questions is that matters regarding residence depend on the facts and, although mention has not been made of certain of these, I have assumed that the two properties are not closely situated and the client is not married.
As stated in section 222(5), Taxes Act 1988, the reason for the making of a residence election is that the individual has a choice to make out of two or more places of residence. Normally, as per Griffin v Craig-Harvey [1994] STC 54, the two-year election period starts from the ownership of the two or more properties. However, when there is a change in the combination of residences, then the two-year election period is restarted. By this is not just meant ownership, but also availability for occupation. In addition, for people not aware of the time limit, Extra-statutory Concession D21 extends the period for 'a reasonable time of the individual first becoming aware of the possibility of making a nomination'.
The Revenue's Capital Gains Manual covers situations of 'Two or more residences' and their 'Right of nomination'. Paragraphs CG64486 and 64487 state that for a section 222(5) election to be effective 'a property must be in use as a residence of that individual before a nomination can be valid. A nomination cannot be used to convert a dwelling house which is not being used as a residence into a residence for the purpose of obtaining relief'. In contrast it also adds, 'In certain circumstances the legislation treats a dwelling house which is not a residence as if it were a residence for a particular period ... In these circumstances the right of nomination applies in the same way as if the dwelling house were actually a residence'. The certain circumstances regarding residing in job-related accommodation and periods of absence are covered in sections 222(8) and 223(3), and also (see below) in Extra-statutory Concession D49.
Therefore the thinking of 'Home from home' is correct.
Where someone buys a house and is not able to move in immediately because it is being renovated or redecorated, or he has not been able to sell his previous main residence, then provided this delay is for not more than one year, or two if there are exceptional circumstances, the Revenue will regard the residential period as commencing from the date of acquisition (see Extra-statutory Concession D49). However, applying the question to the circumstances in this case, if the already owned holiday let property is being referred to as the property undergoing renovation, then under the facts the property will only become a 'residence on completion', as the circumstances are not within Concession D49.
I think we are talking here about a fantasy situation. If it were possible to have a 50:50 (or any other specific) allocation, one would have to have kept meticulous records of proof of the division of use of the properties, but the legislation does not cover such circumstances. There are, however, as per Concession D49, certain periods in which one can have two residences running side by side and be entitled to 100 per cent private residence relief on both properties. Apart from using the facts (for example address registered for voting, third party correspondence address for dividend warrants, place of work), there have been judicial interpretations which reveal that percentages are not necessarily relevant, with there being no minimum period. For example, in the Capital Gains Manual at paragraph CG64441 'The test of residence is one of quality rather than quantity of occupation. A dwelling house must have become its owner's home'. So no minimum qualifying period of occupation can be relied upon to constitute residence. This point was expressed by Mr Justice Millett in Moore v Thompson [1986] STC 170 in the following terms: 'It is clear that the Commissioners were alive to the fact that even occasional and short residence in a place can make that a residence; but the question was one of fact and degree for the Commissioners. Every case must be decided on its own facts'.
Also, in Frost v Feltham [1981] STC 115, Mr Justice Nourse said 'If someone lives in two houses the question, which does he use as the principal or more important one, cannot be determined solely by reference to the way in which he divides his time between the two'. Therefore the answer to this query is 'all or nothing'. - N.K.
The basic points relating to an election under section 222(5), Taxation of Chargeable Gains Act 1992 are set out by the querist, but clarification is sought on three points to which I would reply as follows.
First, for an election to be made, both houses must be in use as a residence of the taxpayer and this is made clear at paragraph CG64486 in the Inland Revenue's Capital Gains Tax Manual. Therefore, if a house was purchased by a client of 'Home from home' and he never moves into it, that house will not be a residence. This position is clarified in an example at paragraph CG64496 of the manual. A person buys a house in 1985 and starts to use it as a residence on 1 July 1986. The two-year period for the election starts from 1 July 1986 and so the same principle would apply where a property is acquired for letting and only becomes a residence after a period of time.
Secondly, as with the first question, the trigger point for the election is only when the second house becomes a residence. If the second house is in such a state of disrepair that the taxpayer does not live in it, the house is not a residence and the time period for the election will only commence when the taxpayer moves in. However, if he lives in the house while doing it up, the time period of two years will be started.
Thirdly, I would refer 'Home from home' to Mr Justice Nourse's comment in Frost v Feltham [1981] STC 115. He commented that when deciding which is the principal residence of a taxpayer 'the question … cannot be determined solely by reference to the way in which he divides his time between the two'. Therefore a 50:50 split does not mean that a principal residence cannot be determined, but one must look at other factors. If he has a partner, this would include where his partner and any family may live. Other potential factors are laid out in the manual at CG64552. However, 'Home from home' should remember that any decision will be based on the facts of the case and should not treat the pointers in the manuals as a checklist. For example, a taxpayer may own houses A and B, splitting his time equally, but considers A to be his principal residence. The fact that he registers to vote in the constituency where house B is situated, because it is a marginal constituency, does not, of itself, make house B the principal residence. In any case, the relief will not be split 50:50 between the houses. It has been assumed that 'Home from home' envisaged a situation where a client would be moving back and forth between the two houses, rather than living full time in one house and going to live full time in the other. - Hodgy.
Extracts from further replies received:
The main problem, in the absence of the election, is to establish the facts clearly. Tolley's Practical Tax Newsletter (1 February 2002 at page 24) included an interesting example of the Inspector making a beneficial determination of main residence status, without the taxpayer realising that it was possible, where a son inherited a second house from his father. The Inspector decided that the son had used this house as his main residence immediately after the death of the father, because he had been living in it to care for him during a terminal illness. As a result, the inherited home enjoyed the 'last three years exemption' on sale seven years later. This was not claimed on the return, and only arose because the Inspector made an enquiry into the return. -Castlegate.
The Revenue's helpsheet IR 283 reflects Griffin v Craig Harvey. It states that 'You can nominate which residence is to be treated as your main residence for any period. Your nomination must be made within two years of the date you first have a combination of residences. If there is a change in your combination of residences, a new two-year period begins. If you do not make a nomination, the question of which is your main residence will be determined on the facts'. With the repeal of section 222(5)(b), Taxation of Chargeable Gains Act 1992, there is no longer the requirement on the Revenue to make a determination. The decision has to be made by the taxpayer when completing his tax return and the onus is on him to get it right. - MP.
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