Capital Gains Tax and Principal Private Residence Relief – quality over quantity
A recent case has considered the requirement for an individual to occupy a property as their only or main residence in order to qualify for principal private residence relief (PPR relief) for capital gains tax purposes. Depending on factors such as the period of ownership, if an individual intends to occupy a property as their only or main residence for a continuous period, PPR relief may potentially be available even for a short period of occupancy.
In the case of Bailey v HMRC, it was decided a taxpayer was entitled to PPR relief despite only occupying the property in question for a short period of time. The tribunal judge emphasised the importance of 'quality over quantity' of occupation.
Mr Bailey purchased a house in 2008 through his company, Landseers Ltd, using a three month bridging loan. Mr Bailey moved into the property and planned to obtain a personal mortgage to purchase the house from his company. At the time of the 2008 financial crisis Mr Bailey was unable to obtain a 'normal' mortgage and instead was only able to secure a 'buy to let' mortgage. Without such a mortgage, Mr Bailey's company would have defaulted on the bridging loan and the property would have been repossessed. Mr Bailey obtained the buy to let mortgage and rented the property to a friend. Mr Bailey lived at his partner's property.
In 2010 Mr Bailey's friend (and tenant) died. Following the death of his friend, Mr Bailey once again moved into the property with the intention of it being his family home. Unfortunately Mr Bailey suffered clinical depression following his friend's death. As a result, Mr Bailey moved out of the property for a second time. Mr Bailey subsequently sold the property realising a capital gain of £121,000.
Mr Bailey submitted a tax return for the 2010-2011 year but did not declare any capital gain. HMRC realised the omission and argued that there was no evidence to show Mr Bailey had lived at the property as his main private residence during his ownership and that PPR relief was unavailable.
The tribunal judge found in favour of Mr Bailey. The tribunal referred to previous case law reasoning that in order to turn mere occupation into 'residence' for the purposes of PPR relief, there must be some degree of "permanence, continuity, or expectation of continuity".
The judge noted that Mr Bailey may not have owned the property during his first period of occupation because of the arrangement with his company. The judge therefore focussed on Mr Bailey's later occupation of the property. On the basis Mr Bailey had owned the property for less than three years (being the relevant period of ownership at the time) and occupied it as his main residence for part of that time intending it to be his home, the judge found that Mr Bailey's residence had the required degree of "permanence, continuity or expectation of continuity" for PPR relief to apply.
This case demonstrates the importance of quality over quantity of occupation for PPR relief but it was decided on its facts and in particular the length of Mr Bailey's period of ownership was relevant.