Private Residence Relief: When ‘Quality’ Trumped ‘Quantity’!

Mark McLaughlin highlights a recent case in which an individual’s quality of occupation of a property was sufficient to secure private residence relief, despite having occupied it for short periods.

Most individuals who dispose of their dwelling-house expect that any capital gain will be subject to private residence relief. Many of them are correct but, unfortunately, some are left disappointed. 

Private residence relief broadly applies to gains accruing to individuals on the disposal of (or of an interest in) all or part of a dwelling-house, which has (or has at any time during his period of ownership) been his only or main residence (TCGA 1992, s 222).

The fundamental requirement for the relief is that the dwelling-house is the individual’s ‘residence’. However, there is no statutory definition of the term for these purposes. This has resulted in numerous disputes between taxpayers and HM Revenue and Customs (HMRC) reaching the courts and tribunals as to whether the taxpayer occupied their property as a residence.     

A common misconception among taxpayers is that there must be a minimum ‘safe’ period of occupation as a residence before private residence relief will be available. Unfortunately, this is not the case. Short periods of occupation can be sufficient, but the quality of the individual’s residence is generally considered to be more important.

For example, in Bailey v Revenue and Customs [2017] UKFTT 658 (TC), the appellant and his partner bought a house in Maidstone. The appellant had a successful property business. His company acquired a property in Farnham, Surrey (known as ‘Richmond’) in February 2008, which was intended to be a family home. The appellant moved some furniture from Maidstone into Richmond and his children lived with him in the property for two and a half months. He intended to buy Richmond from the company. However, the only mortgage available was a ‘buy-to-let’ one, and its terms did not allow him to live in the property. The appellant bought Richmond from the company on 2 May 2008, and let it out. He then lived with his partner at her property. When Richmond’s tenant died, and his widow left, the appellant moved into the property in May 2010, again intending to make it a family home. However, because of the appellant’s mental state, he was unable to cope with living in the house and sold it on 31 August 2010. He subsequently sought private residence relief on the property.

The First-tier Tribunal held that on each occasion when the appellant moved into Richmond, he intended that his residence would be on a permanent basis and that the property would be his home. The appellant did not own the property during his period of occupation in 2008 (he owned it from May to August 2010), so the first period of residence did not qualify for private residence relief. The appellant’s second period of occupation was brief and the period when the property was occupied as his home before he decided to sell was even briefer, but in the tribunal’s view this was a case where ‘quality’ trumped ‘quantity’. The tribunal found that at least part of his residence in 2010 had the requisite degree of ‘permanence, continuity or expectation of continuity’ (Goodwin v Curtis ]1998] STC 475) for Richmond to have been his ‘residence’ for private residence relief purposes.

It should be noted that, in Bailey, the appellant owned the property for around 28 months (i.e. from 2 May 2008 to 31 August 2010), but occupied it as his residence for approximately three months (i.e. from May to August 2010). Private residence relief at that time treated the last 36 months of ownership of an only or main residence as qualifying for relief (i.e. including periods of absence), so the gain was subject to relief in full. However, this final qualifying period was reduced from 36 months to 18 months for disposals from 6 April 2014. 

It is also worth noting that in Bailey, the property had been let, broadly from when the appellant acquired it until he occupied it as a residence. Private residence ‘lettings relief’ may be available in respect of a gain that would otherwise arise by reason of the letting, where all or part of the property has been let as residential accommodation at any time during the individual’s period of ownership (TCGA 1992, s 223(4)). 

In its own guidance, HMRC accepts that the test of residence is one of quality rather than quantity (see HMRC’s Capital Gains manual at CG64435). However, HMRC also warns that there is no minimum period of occupation that would enable an individual to establish a residence. ‘Quality’ is such that occupying a property does not necessarily make it a residence for relief purposes. Evidence will be important in many cases to demonstrate the necessary degree of permanence, continuity or expectation of continuity to satisfy the residence requirement.