If you are selling your buy-to-let property and have lived in the property as your main home during part or all of your ownership, irrespective of the conditions of your mortgage, you should consider whether any part, or all, of your ownership qualifies for Private Residence Relief (‘PRR’). This could result in a substantial tax saving.
What is PRR
PRR provides that no Capital Gains Tax (‘CGT’), or a proportionate amount of CGT, is payable where an owner has occupied a residential property as his or her main residence.
A recent update
A case was recently decided by the First-Tier Tribunal between Mr Bailey and HMRC which concerned PRR.
Mr Bailey bought a property (‘Richmond’) through his company in 2008 using bridging finance. Later the same year, Mr Bailey decided that Richmond would make a good family home and decided to buy Richmond from his company. Mr Bailey and his family lived in Richmond for two and a half months whilst the financial arrangements were sorted although only some furniture was brought from their other property. No elections of residence were ever made.
Mr Bailey had intended to purchase the property with a residential mortgage, but owing to the financial crash, he could only obtain a buy-to-let mortgage for Richmond, which he did and, as the terms of the mortgage forbid him from residing in the property, he subsequently let Richmond to a friend.
The friend died in early 2010 and Mr Bailey again moved into Richmond with his family with a view to making it his home. However, within a couple of weeks of moving in, due to Mr Bailey’s mental state, he was unable to cope with living at Richmond and decided to sell it. The sale realised a gain of £121,000.
Mr Bailey argued that Richmond had been his residence, albeit only for a few months in 2008 and a lesser amount of time in 2010, and as his ownership of Richmond did not exceed three years (now 18 months), no CGT was due. No guidance is provided by HMRC on the length of residence required to establish whether PRR is available.
HMRC disagreed and opened an enquiry which resulted in an assessment in respect of CGT of over £27,000.
The Tribunal Judge sided with Mr Bailey stating that it was clear that each time Mr Bailey moved into Richmond, he intended it to be his principal residence. It was unclear whether the first occupation of Richmond in 2008 could be counted, as Richmond has been owned by the Company. However, focussing on the second lesser period of occupation, the Judge stated that the “quality” of the occupation trumps “quantity”.
It was found that Mr Bailey’s occupation of Richmond in 2010 had the requisite degree of “permanence, continuity or expectation of continuity” for Richmond to be classed as his residence within the meaning of the CGT legislation.
The Judge decided that despite the fact Mr Bailey and his family did not live in Richmond for a long period of time, they treated it as their main residence and had expected to continue living there.
The CGT assessment, and a penalty, issued by HMRC was cancelled.
What does this mean?
This case solidifies the interpretation of the law and shows that it is possible to claim PRR in respect of a very short period of occupation, provided that there was an intention to occupy the property concerned as a residence for a continuous period.
This case also reaffirms the fact that the Court will look at the quality of the occupation as opposed to just the length of the occupation.