Determining principal private residence status for capital gains tax exemption can be problematic, particularly around definitions of temporary accommodation. Peter Vaines examines the case law.
Everybody is familiar with the capital gains tax exemption for the only or main residence in s222, Taxation of Chargeable Gains Act 1992. There are lots of technical issues that arise with the exemption, but I am concerned here with the basic building block for the exemption: that the property must be a residence.
Although that sounds straightforward, all sorts of difficulties seem to arise.
The starting point in all the authorities on this matter is always the judgement of Lord Widgery in Fox v Stirk [1970] 3 All ER 7 who said that ‘a residence’ means:
- the place where a man is based or continues to live;
- where he sleeps, shelters and has his home;
- something other than temporary accommodation; and
- there is some expectation of continuity with a degree of permanence.
This has been considered by the courts many times. Decisions of the courts and tribunals are published so as to assist the citizen in understanding the law on a particular subject. Decisions may differ having regard to the particular facts of the case, but the legal principles ought to be clear.
When it comes to the decisions on the exemption for the main residence, clarity seems to be in short supply.
Temporary accommodation?
Eight months
Let us start with the case of Susan Bradley v HMRC [2013] UKFTT 131 (TC). Mrs Bradley lived in a house that she owned jointly with her husband. She also owned another small house that was normally let. She decided to leave the matrimonial home and moved into the small house when it became vacant in April 2008, making various improvements and generally making it her home. Although the property was on the market, the market was very poor and she expected to live permanently in the property. However, Mr and Mrs Bradley later became reconciled and she moved back to the matrimonial home in November 2008. She sold the small house in January 2009.
During the period April 2008 to November 2008, she lived in the small house and probably felt confident that the property would qualify not only as her residence but as her main residence.
The tribunal decided that the property was not Susan Bradley’s residence at all. It said that she never intended to live permanently in the property; it was only ever going to be a temporary home and it was therefore never her residence.
The tribunal was heavily influenced by the Court of Appeal judgement in Goodwin v Curtis CA 1998 70 TC 478 where it was held that the occupation of the property must show some degree of permanence and some expectation of continuity, which were two of Lord Widgery’s tests in Fox v Stirk. However, in Goodwin v Curtis, the taxpayer had separated from his wife and family, stayed in the property as temporary accommodation, and after only two days he completed the purchase of another property, which was intended to be his private residence.
It was a bit of a stretch to suggest that Mr Goodwin occupied the property as his residence; it was obviously the most temporary of accommodation. This is a long way from the situation of Mrs Bradley, who moved into a perfectly suitable home, took steps to make it more of a home and lived there from April to November without any intention of moving out unless the house were to be sold, which was unexpected.
Mrs Bradley may have thought herself a bit unlucky with the outcome of her case, but maybe she accepted that she was not really there long enough for it to be her residence. However, she would have been seriously enraged by reading the case of David Morgan v HMRC [2013] UKFTT 181 (TC), which was published only three weeks later.
Two weeks
Mr Morgan was getting married. He was in the process of purchasing a property that would be the matrimonial home. He was living with his fiancée’s family, but unfortunately the relationship ended two weeks before the purchase of the intended matrimonial home, so he went to live with his parents. Nevertheless, he carried on with the purchase of the property and moved in for two weeks, specifically to prepare the house for renting, and then moved back to live with his parents. The property was let and then sold. He claimed the exemption – to which many might have thought: you cannot be serious! However, the tribunal decided that Mr Morgan had lived in the property for two weeks and this was enough to qualify it as a residence.
Nine months
Then we have the case of Piers Moore v HMRC [2013] UKFTT 433 (TC). Mr Moore also had matrimonial difficulties and moved into another property, taking furniture with him from the matrimonial home. He took all of his clothes knowing that he would never return. He lived there from November 2006 to July 2007, spending pretty much every night there except when he was away on business. The tribunal found that he did not occupy the property with a sufficient degree of permanence for it to be a residence. It was only temporary accommodation.
Seven weeks
Then we have the case of Dutton Forshaw v HMRC [2015] UKFTT 0478 (TC). Mr Dutton Forshaw had owned and lived in loads of properties. In the end, the issue was whether the property in which he had lived for seven weeks was a residence. In these circumstances, one might have thought that HMRC was on strong ground in claiming that this was not a residence at all but merely temporary accommodation. However, the tribunal took the view that if this was not the taxpayer’s residence for that period, he would have had no property that was his residence and the tribunal thought that would be surprising. Accordingly, it decided that there was sufficient permanence or continuity for his seven-week period of occupation for it to be his residence and his main residence.
Susan Bradley would by now have disappeared into a slough of despond. There she would probably have found Piers Moore – and also Mr Yechiel.
Nine months
Mr Yechiel had claimed the exemption too: Yechiel v HMRC [2018] UKFTT 0683 (TC). He bought a property in September 2007 with the intention it would be the family home for him and his fiancée. It needed significant work, so while this was going on they lived in a one-bedroom flat elsewhere.
They got married, but the marriage came to an end in January 2011, and in April 2011 he moved into the intended property. In October 2011, the property was advertised for rent and sale. In December 2011, he moved back to live with his parents, and he sold the property in August 2012.
There was no dispute that Mr Yechiel lived there, although the accommodation was rather unsatisfactory. It had a bedroom, a kitchen and a bathroom and he slept there every night between April 2011 and July 2011, although it is not clear what happened after July. He did not cook there (he did not cook at all it seems) and had meals at his parents’ house or had a takeaway. He had meals at his property, sometimes standing up, sometimes in his car and sometimes in bed. He received post at the property but took his clothes to his parents for washing (this rings a distant bell).
The tribunal said that as well as occupation and an intention to occupy the property with a reasonable degree of permanence, the quality of his occupation must be determined by what he actually did in the house. They considered that to have the quality of residence, the occupation of the house should not only involve sleeping, but also periods of cooking, eating meals sitting down and generally spending some periods of leisure there. It is not clear where the authority for these additional conditions comes from.
Clearly Mr Yechiel’s living arrangements were unsatisfactory compared with people in rather better circumstances, but the fact that he ate his takeaway meals in bed or standing up seems a rather bizarre criterion on which to base whether he was living in the property. The tribunal members might have thought “you cannot live like that”, but some people have to. They eat their meals in bed or standing up because they cannot afford a table – or perhaps not one that is big enough for all the family.
Six weeks
With all the above in mind, I turn to the case in October 2020 of Core v HMRC [2020] UKFTT 440 (TC).
Mr and Mrs Core bought a property in Green Lane. They did not move into Green Lane immediately because they were doing building work. They moved into the property in March or April 2014 and they were soon approached by somebody who made an offer for the property. They rejected the offer, and did so again when the offer was repeated. However, about a month later, the purchaser made a higher offer that Mr and Mrs Core decided to accept. They had occupied the property for six weeks and the tribunal found that this was enough to represent a residence, as they had moved into the property expecting to live there for an indefinite period.
I could go on. There are many other cases on this subject.
In need of guidance
In any kind of litigation, there are always opposing views, but the idea is that a coherent body of authority is built up to assist our understanding of the meaning of complex legislation. Nowhere is this more important than in taxation where the state has a legislative right to deprive citizens of their money.
It is really unhelpful (and wasteful) for confusion to exist. If HMRC and the taxpayer both have a long list of authorities on their side because of the contradictory nature of tribunal decisions, this merely promotes litigation. The taxpayer will clearly be encouraged to fight his case when he has loads of similar cases that directly support his claim – and you cannot blame HMRC for opposing him if it has loads of cases that directly support its position. As can be seen, the outcome is utterly unpredictable and sometimes inexplicable.
We urgently need some definitive guidance from the superior courts here. As things stand, one might question the value of publishing First-tier Tribunal cases – particularly as they do not have any precedential authority anyway.
About the author
Peter Vaines practises at Field Court Tax Chambers.
This article is reprinted from the UK Tax Bulletin November 2020