A new client has come to you for advice about a property he has sold. He lived in it on and off during the ownership period, although there was a delay in initially completing the exchange. He had other properties that he has occupied as his home as well. You believe some private residence relief (PRR) will be due. How should you approach quantifying this?

Background

Private residence relief (PRR) is intended to remove any charge to capital gains tax (CGT) when an individual sells their home. Where a client only owns one property, i.e. the one they live in, this is relatively clear cut.

Example. Jim purchases a house in March 2010, and lives in it until he sells in March 2020. The property was his only residence for the entire ownership period, so PRR will apply to fully relieve any gain made.

Practice point. Straightforward disposals of property that your client has always occupied as their only residence like this one are completely exempt and do not need to be reported via self-assessment.

However, things can be more complex where your client has a number of properties and genuinely uses more than one of them as a home. There are further matters to consider where there have been periods of absence from the property. You might also be asked to advise on disposals of property that has been acquired prior to construction, i.e. “off-plan”.

Multiple properties

The first thing to note is that PRR can only apply to a property if it has been used as the only or main residence by your client at some point during the period of ownership. This means that selling a property which has always been let out or was purchased with the sole intention of renovating and selling at a profit won’t attract PRR.

If your client moved into the property during the renovation period, things become less clear. Whilst this might well have been the only residence they had available to them, s.224(3)Taxation of Chargeable Gains Act 1992 (TCGA) prohibits any relief where the property was acquired “wholly or partly for the purpose of realising a gain from it” .

Intention of gain

This can give rise to confusion, as it may well be at the back of a homebuyer’s mind that a particular property will appreciate over time and be a partial motive for purchase. However, HMRC’s CGT manual at CG65210 (see Follow up ) confirms that s.224(3) should only be applied where the primary purpose of buying the property was an early disposal at profit. Consider the following two examples.

Example 1. Brenda purchased a house for £180,000 in 2016. She spent around £35,000 on a new kitchen, bathrooms and converting the attic. She lives in the house with her children until 2022, when it is sold for £300,000.

Example 2. Clive purchases a repossessed property at auction for £100,000 in 2020. It is in desperate need of modernisation. Clive moves in and carries out major repair work at a cost of £20,000, replacing most of the fixtures and the boiler, painting it with neutral colours and installing basic carpets. He markets the house six months later as an “ideal-buy-to-let”, and it quickly sells for £200,000.

The two scenarios here are clearly different. Brenda has used the property as a family home over six years. Whilst there has been a profit, at least some of this will be due to inflation, albeit there has also been some capital improvement. There should be no issue claiming PRR on the gain.

Conversely, Clive appears to have purchased his property with a clear intention to renovate and sell to make a quick profit. Whilst not completely impossible, he would likely have a considerable amount of convincing to do in order for HMRC to accept he intended to occupy the property with any material degree of certainty. He might also find that HMRC tries to impose an income tax charge if he buys and sells like this regularly.

Practice point. The test is one of intention. For example, if Clive had purchased the property with the intention of making it his home but his circumstances changed later on, PRR could well be available. For example, if Clive met a new partner and decided to move into their property with them due to it being more suitable.

Evidence

If you have a client who has realised a gain in a relatively short period, investigate the motivation behind the purchase. In particular, you should look to be able to demonstrate some of the following to an inspector:

why the property was suitable for the client as a main residence, i.e. nearer to work, schools, etc;
that there was some material occupation. This could be evidenced using council tax bills, car registration documents, and things like photographs; and
any intention to sell arose after the purchase, i.e. it wasn’t a motivation for acquiring the property.

Practice point. Recent tribunal cases show that HMRC is using more inventive techniques to deny PRR. Stating that the decision to sell was recent is likely to fail if the property has been advertised for sale for longer.

Elections etc.

Assuming that the intention test above is not an issue, the next step is to check whether any election under s.222(5)(a) TCGA 1992 has been made. This election is intended to make a declaration about which property is to be treated as the main residence in situations where there is more than one home. If so, the question of exactly when the property was occupied for the purposes of PRR will follow the pattern of the election, and any subsequent amendment. This makes your job easier.

Practice point. To be valid, an election must be made within two years of a change to the combination of residences available, i.e. after buying or selling a property, or commencing or ending a period of letting.

As a general pointer, an election can be useful, particularly if a second property is only likely to be used occasionally. Standard planning is to review the potential for capital growth and ensure the property most likely to appreciate has the election in place. If there is another property with lower growth potential it is still worthwhile amending an election onto it for a short period of time to secure the final period of relief. Currently, this covers the final 18 months of ownership, but will fall to just nine months from 6 April 2020.

Practice point. Changing the election from and back to the property with the highest growth is also known as “flipping”.

Actual occupation

If your client has made no election you will need to consider the actual pattern of occupation when looking at PRR entitlement. The problem here is that without an election in place, your client will have to demonstrate that, not only was the property being sold used by them as a residence, it was the main residence for at least some of the time. This means that a property only occasionally occupied by your client is unlikely to qualify, even if it is a genuine second home. The amount of PRR is then given by multiplying the gain by the fraction of occupation/total period of ownership.

Practice point 1. This illustrates just how crucial it is to persuade clients to make a main residence election as soon as possible. Remember, it needs to be done within two years of acquiring a new combination of residences.

Practice point 2. A new election window could be opened by letting out a property for a short time, as it changes the combination, i.e. the available residences decreases by one. A property can’t be occupied by the owner if there is an incumbent tenant.

Once you have identified that the property your client has sold was indeed their main residence for at least some of the time, you need to establish how much of the period of ownership was covered by occupation. Occupation can be “actual”, i.e. periods of time your client was physically living in the property, or “deemed”, where the client was absent but deemed to be occupying the property under specific provisions of TCGA 1992 .

Deemed occupation

Certain periods of absence can count toward the occupation, which will increase the proportion of PRR. The most common is the final 18 months (nine months from 2020/21 onward).

Example. James buys a house in 2012 and lives in it for one year. The property is unoccupied until 2019 when it is sold. The PRR fraction would be 2.5/7, i.e. actual occupation of one year plus 18 months of deemed occupation.

Practice point. This is a further reason to ensure an election is made, as the final period can apply to more than one property at a time.

There are further permitted periods of absence, which are discussed at CG65040. In particular, you should look for periods of absence which have a period of actual occupation both before and after the absence. Up to three years of deemed occupation can be given here.

Example. Jennifer bought a dwelling house in May 2010. She occupied it as her only residence until June 2012. In that month she had a large lottery win and decided to see the world. She was away until August 2016 when she returned home and occupied the dwelling house again as her only residence until she sold it in March 2020. The period of absence in the middle of the ownership lasted just over four years. Three years can be included as deemed occupation when calculating PRR.

Practice point. You do not need to give any reason for the absence. There are other periods of absence that can qualify as deemed occupation, for example where your client needed to move to work for an employer.

When does ownership start?

When a property is purchased, there is almost always a delay between the exchange of contracts and completion. Legally speaking, the exchange of contracts is the point the transfer becomes legally binding. However, it is rare for a buyer to be able to occupy a property between the date of exchange and the date of completion.

Which of these dates counts as the start of the period of ownership for PRR purposes was the subject of a long-running argument between a taxpayer and HMRC. However, the Court of Appeal appears to have finally given this a sense of certainty in a decision in late 2019.

Mr Desmond Higgins (H) exchanged contracts on a property off-plan, i.e. before it had been constructed. There was a significant delay between this exchange and the date he was able to move in, i.e. the completion date. He later sold the property and claimed PRR in full against the gain arising on the basis that he was unable to occupy the property any earlier than he did.

Disagreement and tribunals

HMRC amended the claim, arguing that the period of ownership began with the exchange of contracts. As there had been no actual or deemed occupation during the interim period, only a proportion of the gain could qualify for relief. H appealed and was successful at the First-tier Tribunal. However, the Upper Tribunal sided with HMRC on appeal.

Court of appeal hearing

In D Higgins v HMRC [2019] EWCA Civ 1860 (see Follow up ), H was successful in convincing the court that the completion date was the appropriate one to use for the purposes of PRR.

The Court pointed out that were HMRC’s interpretation correct, i.e. that the date of exchange should be used, then virtually every disposal of property would be subject to a restriction, however small. This would appear to be at odds with the intent of Parliament when the relief was introduced.

Crucially, although s.28 TCGA 1992 refers to the ownership of a dwelling commencing at the exchange date (the main basis of HMRC’s argument), the Court noted that the PRR provisions make no reference to s.28 .

Practice point 1. This is a precedent, so ensure you use the completion date when working out clients’ PRR entitlement going forward.

Practice point 2. It may also be worth resubmitting any returns with gains that have been calculated on the basis of using the exchange date.

Start by checking whether the client has made elections as to which property was their main residence. Following a 2019 Court of Appeal decision, it is now confirmed that the date of completion is the date the period of ownership starts for PRR purposes, so ensure you don’t use the exchange of contracts date or your client might overpay.

Follow up

D Higgins v HMRC [2019] EWCA Civ 1860
HMRC guidance – CG65040
HMRC guidance – CG65210

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