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August 9, 2019
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It's What You Know - Private Residence Relief & Evidence of Intention

In the recent case of Fitzjohn v HMRC (2019), the First Tier Tribunal took into account the taxpayers' experience and knowledge of the housing market when determining his intention on the purchase and occupation of two properties following the breakdown of his marriage.

After taking into account Mr Fitzjohn's background, the FTT held that his intention was for the properties to be a temporary stop-gap whilst he tried to reconcile with his wife, while using his expertise to spot attractive deals and make a profit.

What is Private Residence Relief?

When a property is sold, Principal Private Residence Relief ("PRR") is available if the seller is disposing of their only or main residence. If the seller has lived there as their home throughout the whole period of ownership and makes a gain when they sell the property, all of the gain is exempt and no capital gains tax is chargeable. This would not need to be reported on the seller’s annual tax return.

In line with this, a gain will only arise where the seller has been absent from the property at some point, although some periods of absence can be treated as occupation for capital gains tax purposes. Where a chargeable gain arises, this would need to be included on the seller’s tax return in the relevant year.

The Facts

  • Mr Fitzjohn is employed as an estate agent and has been for a significant number of years.
  • In December 2005, as a result of marital problems he moved out of the home that he lived in with his wife and family and bought another property. He sold this property in March 2006 and reported the gain on his 2005/2006 tax return, not claiming PRR.
  • He then bought another property in April 2006 and sold it 4 months later, making a gain of £36,995 on the sale.
  • Following this, he bought another property in May 2006 and sold it 5 months later, making a gain of £16,000.
  • Neither of these disposals were included on his 2006/07 tax return because he alleged that they were his only or main residence and therefore eligible for PRR.
  • In November 2014, HMRC began their check into Mr Fitzjohn’s 2005/06 and 2006/07 tax returns as they became aware that he had sold properties which had not been  included in his return.

The Case

HMRC contended that the matrimonial home had remained the taxpayers' main residence throughout the period in question, and the two properties merely constituted temporary accommodation purchased with a view of reconciliation with his wife at a later date.

In support of their argument, HMRC referred to information from the City Council showing that the taxpayer was registered at living at the matrimonial property address and an exemption for an empty or unfurnished property had not been made.

In response, the taxpayer argued that he had intended to live in both properties as his main residence at the time of purchase, and historically had frequently moved home.

After purchasing the first property, the taxpayer quickly realised that he did not care for the area in which the house was based. He therefore purchased the second property in a preferred location.

Although the second property was of a suitable size and in a preferred location, there were difficulties with taking his children to school, resulting in this property also being sold soon after purchase.

The Decision

The FTT agreed with HMRC and held that neither property was intended by the taxpayer to be a permanent residence. Therefore, the taxpayer was not entitled to PRR in respect of the sale of these properties.

In reaching its decision, the Tribunal noted that as Mr Fitzjohn declared the sale of the property in March 2006, he was aware of the permanence required to claim the relief.

As the other two properties were acquired during the period that he was trying to unite with his wife, this does not suggest that he intended to live in them to the level of permanence required for PPR to apply.

In light of his experience as a reputable estate agent, it was agreed that the taxpayer would have been aware of what accommodation was required for his children, and the most likely situation was that he used his property knowledge to buy and sell the two properties in order to make a profit.

All things considered, the Tribunal was satisfied that not only was PRR not available in respect of the gain, but that the failure to report these disposals was a deliberate error with an intention to bring about a loss of tax.

As a result of this, in addition to the capital gains tax due for 2006/07, Mr Fitzjohn was given an additional penalty.

What Does This Mean for Taxpayers Who Dispose of Property?

If you are considering selling your property, it is crucial that you consider whether you will be eligible to claim PRR. This is especially important where you only lived in the property for a short period of time prior to disposal.

Furthermore, if you do not declare a disposal and HMRC find that the failure to report the gain was deliberate, you may face heavy penalties.

If you are unsure of whether you can claim private residence relief, please contact a member of our team.

Related Articles

Ritchie v HMRC - Principle Private Residence Relief Pitfalls (22 June 2017)

Evidence Necessary to Support Private Residence Relief - Alison Clarke v HMRC (22 October 2014)

Trading Asset or Principal Private Residence? - Trevor Anthony Hartland v HMRC (6 February 2015)

Capital Gains Tax - Sale of Home but is it a Residence? (29 August 2013)

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