It’s the quality not the quantity!

Mark McLaughlin highlights an important factor in the availability of capital gains tax principal private residence relief on the disposal of a dwelling.

A change in personal circumstances can have tax implications, such as affecting the availability of capital gains tax principal private residence (PPR) relief. For example, a house might be occupied for only a short time before the sale, due to a change of plans following a relationship breakdown. 

A common question asked by house owners is how long they must occupy the property before they can claim PPR relief. However, there is no ‘safe’ period. Furthermore, the property must be the individual’s ‘residence’; courts and tribunals have indicated that ‘quality’ is more important than the length of occupation. 

For example, in Yechiel v Revenue and Customs [2018] UKFTT 0683 (TC), the taxpayer purchased a property in September 2007 as a future matrimonial home. The property needed significant work. The taxpayer applied for planning permission to extend the property and let out the house in the meantime. Planning permission was granted in March 2008. The taxpayer and his fiancée married in August 2008, but in January 2011 his wife instructed divorce lawyers. In April 2011, the taxpayer moved into the property. It was advertised for rent and for sale in October 2011. In December 2011, the taxpayer moved to live with his parents nearby. In August 2012, the house was sold. 

HM Revenue and Customs (HMRC) challenged the availability of PPR relief. The taxpayer spent most, if not all, nights between April 2011 and July 2011 at the house. The First-tier Tribunal (FTT) considered that the taxpayer’s intentions at April 2011 were important. He clearly did not want to continue living with his wife and did not want to live with his parents either. The taxpayer needed a home and moved in with the intention of living there for a period of time. However, it was not possible financially for the taxpayer to manage the financial demands of his divorce and maintain a large family home (with a significant mortgage) to live in by himself.

The FTT concluded that the short period of occupation, minimal use of the house other than for sleeping, coupled with use of another house (i.e. the taxpayer’s parents) for eating, laundry, and social connection, together with the lack of evidence of a firm commitment to living in the house long-term, and the financial reality that this did not appear possible, meant that the residence did not have sufficient ‘quality’ for the property to qualify for PPR relief. The taxpayer’s appeal was dismissed.

It is generally accepted that to qualify as an individual’s ‘residence’ there must be ‘some assumption of permanence, some degree of continuity, and some expectation of continuity’ (see Goodwin v Curtis [1988] STC 475). 

As indicated, other cases indicate that ‘quality’ of residence is also important. The FTT in Yechiel was specific that ‘quality’ requires not only sleeping at the property but periods of ‘living’ (i.e. cooking, eating a meal (sitting down, unlike the taxpayer!), and generally spending periods of leisure there); property owners seeking PPR relief should take note.