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HMRC’s tough line on private residence relief

20/04/2017

You own a rental property which you now want to sell. Trouble is you’ll lose a chunk of the proceeds in capital gains tax. A friend tells you that by living in the property for a few weeks you can substantially reduce the tax bill. Is he right?

Private residence relief

Your friend’s idea is theoretically good. A property that has, even for a short while, been your only or main private residence (home) during the time you’ve owned it qualifies for a period of exemption from capital gains tax (CGT). This is known as private residence relief (PRR). PRR applies to the time you lived in the property and the final 18 months (36 months for property sold by 5 April 2014) of ownership regardless of whether or not you occupied it during that time. So far so good.

Tribunal hearing

There are certainly past court and tribunal rulings that will back you up if HMRC decides to challenge you. The trouble is each case has slightly different circumstances which might give HMRC sufficient wriggle room to deny your PRR claim. However, a tribunal decision in early 2014, Iles & Another v HMRC (IA v HMRC) while going against taxpayers, offers some useful pointers.

Quality not quantity

HMRC looks at the quality of occupation not the quantity – when you lived in a property was it your intention to occupy it as a permanent home? If it was then even if you occupied it for one day PRR would apply for that day and the last 18 months of ownership. On the other hand, if you moved into a property as a stop gap while looking for a new permanent home HMRC would have a good case to deny relief. In another case the tribunal ruled PRR wasn’t due despite a taxpayer living in a property for eight months. The deciding factor was that the taxpayer told HMRC that his occupation was temporary.

Tip. Never indicate to HMRC that you’re occupying a home temporarily. The Taxman might get the wrong end of the stick and refuse a claim for PRR without taking account of all the facts.

Only one home

In IA’s case they owned a house which they lived in as the family home as well as a property they had always let out. For financial reasons they wanted to sell both properties. Their main home sold quickly, but they had no buyers for the other property and so they moved into it for 25 days while looking at properties to replace their main home. When they sold the let property IA claimed PRR for the final 36 months of ownership.

Temporary home is not a residence

The tribunal decided that even though the rental property was the only home available to IA it wasn’t truly their residence. It was in effect no more than equivalent to a hotel room because IA had no intention to set up home there.

A real home

The ruling in IA v HMRC doesn’t mean that temporary occupation of a property can’t qualify for PRR. But to qualify you must move into your short-term home lock, stock and barrel.

Tip. Notifying all the relevant authorities (including HMRC) of your move, even if occupation is for a short time, and doing everything you would normally do when you move home will make it difficult for HMRC to argue that a short-term residency doesn’t qualify for PRR.

Moving into a property doesn’t automatically qualify it for a capital gains tax (CGT) reduction. If you intend to occupy a property for a short time, move in lock, stock and barrel. Notify HMRC and other authorities that you have moved. This will improve your chances of reducing any CGT bill when you sell it.