HMRC’s Approach to Private Residence Relief Enquiries

Everyone is aware that one of the most generous reliefs available, at a time when the Government is constantly seeking ways to increase the tax take, is Capital Gains Tax Private Residence Relief (PRR). All you need to do is live in a property. You don’t even have to live in it for the whole period of your ownership, and when you come to sell it, subject to a number of conditions, you don’t have to pay capital gains tax on the increase in value from when you bought it. And this normally applies whether the gain is £100 or £100 million.

Unfortunately, HMRC appears to be finally waking up to the fact that this is a relief which is potentially open to abuse and the number of HMRC enquiries into the sale of property where Private Residence relief is being claimed has increased substantially. Whilst we do not have actual figures of cases opened, our own experience indicates that we have seen more contentious Private Residence Relief cases in the last two years than we have seen during the previous 15 years.

Accordingly, we thought it might be a good idea to highlight the areas where HMRC is challenging clients and to highlight the upcoming changes to the relief.

Too Much land

The legislation gives you a generous half a hectare (1.235 acres) where HMRC will not question the usage of the garden, but if you exceed that, you may need to apportion the cost.  Of course if you live in a (say) 10 bedroom mansion, the legislation gives you some leeway so that they will allow relief for all of it if the land area is appropriate to the size and nature of the property.  You’ll need to consider the fact that what HMRC and the Courts consider “necessary for the use and enjoyment of the property” may not agree with your client’s view as to what is necessary.  In the case of Longson v Baker (HMIT) [2001] BTC 356, it is made clear that any argument on behalf of the taxpayer must be firmly rooted in the objective requirements of what is required for reasonable enjoyment of the property (as a dwelling-house) by reference to the particular property, rather than the particular owner.

Mr Longson claimed that the disposal of just under 18.7 acres of land was exempt from CGT because it comprised, as well as a substantial dwelling-house, land required for the ‘reasonable enjoyment’ of the residence. The land included several stable blocks, providing 17 loose boxes, a garage, hay lofts and barns, one of which was used as an indoor riding facility. The District Valuer advised the inspector that just over 2.6 acres were required for the ‘reasonable enjoyment’ of the residence. In the High Court, the taxpayer lost his appeal, it being held that:

  • the issue under TCGA 1992, s. 222(3) was a question of fact. The position was similar to that under the Housing Act 1936, s. 75, which, in the context of compulsory purchase orders, referred to land as being ‘otherwise required for the amenity or convenience of any house’. Those words had been held to raise a question of fact and, by analogy, so did the words of TCGA 1992, s. 222(3); and
  • use of land for equestrian pursuits was not relevant to the issue of whether that land was required for the reasonable enjoyment of the dwelling-house as a residence. TCGA 1992, s. 222(3) raised an objective test. On that objective basis, there was clearly no requirement to keep horses on the land in order to reasonably enjoy the dwelling-house as a residence. If, for example, the appellant had relinquished his equestrian pursuits and had instead converted the stables to, say, garage classic cars, the requirement for use of the whole 18.7 acres of land would have disappeared.

Accordingly, the key issue to consider is not what amount of land is dictated by the interests or requirements of the householder, but what amount of land is deemed necessary for the use and enjoyment of the residence.  Unfortunately, what is deemed “necessary” is a heavily subjective question as illustrated in a recent meeting where one valuation officer indicated that no property should have an allowable area of more than half a hectare.  Let us hope that the Sandringham estate or Windsor Castle aren’t placed on the market any time soon!

Selling the Land after you’ve sold the property.

A common issue relates to where you want to keep hold of part of a large garden after you’ve sold your home with a view to selling it to a property developer.  There’s no problem with that part, however, you may be in for a nasty shock when you tell your accountant because the land you retain no longer attracts PRR as, at the point you sold it, it was no longer your home.

Partitioning the Land

You’ve owned your home for a number of years and it has a large piece of land around it (the total area owned is three acres so more than the permitted area of 1.235 acres).  Five years ago, you partitioned 1.5 acres of it because you were contemplating selling it but the deal fell through and you’ve just let the land remain fallow with a 6’ fence partitioning it off from the rest of the garden.  A property developer has just offered you a significant sum for the fenced off land – the only problem is, it’s no longer part of your garden nor is it, arguably, necessary for the use and enjoyment of your property.  You may have to pay capital gains tax on the partitioned area sold.

You’re a Serial Property Developer.

In recent years, HMRC has made use of some fairly strong case law when dealing with individuals who move into a property, spend 18 months renovating it, sell it then move into another property to do the same thing. Arguably, what they actually have is a trade and there would normally be no right to PRR on the properties sold.  The lead case is Goodwin v Curtis [1998] BTC 176 which brings case law precedent to the view that the move to a property must be for a settled purpose i.e. is it clear that when you moved in, you had the intention of moving there permanently?  From the case law, the test concerns “quality of occupation” i.e. have you moved in with your family – does your post go there, do you have furniture, is your family registered with a local doctor etc.

HMRC’s problem is picking up these serial developers out of all of the people who might otherwise have fairly peripatetic jobs which entail them moving house on a regular basis.  There is also the issue of those people in areas where land traditionally climbs in value who move rapidly up the property ladder, living in properties for short periods  – Section 224(3) Taxation of Chargeable Gains Tax Act gives HMRC the right to query the intentions of those people since the act states:

224(3) Section 223 shall not apply in relation to a gain if the acquisition of, or of the interest in, the dwelling-house or the part of a dwelling-house was made wholly or partly for the purpose of realising a gain from the disposal of it,…

A good example of when HMRC challenges a client who indicates she has moved into a property for a settled purpose was a case we dealt with involving a client who had separated from her husband.  She had bought a property a few roads away so as to make sure that the children had access to both parents, renovated it, and moved in.  Eight months passed and the client and her husband reconciled and she moved back to the marital home and subsequently placed the new property on the market.

She claimed private residence relief and HMRC enquired into the return.  The client’s agent made representations but ultimately, HMRC stated that they were rejecting the private residence relief claim on the basis that when she moved into the property, there was (in the Officer’s opinion) a strong possibility of reconciliation, and therefore she had not moved in to the property for a settled purpose.

After a four hour fact finding meeting with the client, we were convinced that, contrary to HMRC’s view, when she moved into the property, her primary thought was to make a home for her children and that at that point, there was no thought of reconciliation.  After a number of letters to HMRC pushing this view, we asked for an HMRC statutory internal review and advised that our client was prepared to go to First Tier Tribunal if HMRC did not back down.

In the event, HMRC took notice of our point that we had an eloquent and motivated client who would be happy to defend her position at tribunal, and withdrew from their position.

Whilst we expect HMRC to have a healthy scepticism generally, in our view they held firm to a badly under-researched hypothesis long after they should have conceded, based on the evidence supplied.  However a point to make is that each of these cases relies heavily on detailed facts and there is no substitute for sitting down with clients to go through the exact chain of events culminating in the claim for private residence relief.

You Moved Out Temporarily and Never Came Back

PR reliefs are generous and extend to temporary absences from the property – perhaps for a job move overseas, or to go look after a chronically sick family member. If you eventually move back in, the legislation gives you a theoretically unlimited period of deemed occupation if you move abroad temporarily to take up an employment (S.223(3)(b) TCGA 1992 )  If it isn’t an overseas posting, the limit is 11 years plus any period of letting (subject to the limit outlined below).  However, if you fail to move back in, unless you remain in job related accommodation at the point you sell the property, the most you’ll get is eighteen months additional relief (to be reduced to 9 months after April 2020).  If you’ve let out your property in your absence, there may be some further relief due, albeit this too is subject to change in 2020 where lettings relief will change from the lower of :

  • £40,000,
  • the gain applying to the let period, and
  • the total amount of private residence relief otherwise claimable on the disposal,

to a more restrictive test giving relief only where landlord and tenant are in occupation of the property at the same time.

You Own (and occupy) More than One Home

You can only claim relief for one property as your private residence during any particular period in time (married couples can only claim relief on the same property).  Accordingly, if you own two properties, you might want to consider making an election to HMRC to treat one of those properties as your private residence – usually the one where you are expecting to make the largest gains.  If you don’t, HMRC will look at the factual residence and choose one for you.

Divorce.

If one spouse moves out and the other remains in the marital home, provided the outgoing spouse does not file a main residence election with HMRC, if the outgoing partner’s share in the property is eventually sold/gifted to the spouse who remained resident, (s)he can claim PRR for the whole period including the period during which (s)he was not in occupation.  However complex divorces can take many years to resolve and the need for both parties to move on to new lives can trump any potential tax consequences of holding on for a settlement.

You Didn’t Move Straight In

You live in rented accommodation but you’ve purchased a renovation project which will take 8 years of your weekends and evenings to complete and which you intend moving into once the Grand Designs Team have finished filming.  Sadly, none of that 8 years will qualify for PRR as the concession only gives you 12 months as of right and an additional 12 months for circumstances where you are prevented from moving in which are beyond your control. NB – HMRC’s view is that this is an all or nothing concession so if you exceed the 24 months, essentially you get no relief for that 8 year period, however the recent case of McHugh & Anor [2018] TC 06605 found that HMRC’s view of this concession was incorrect and the taxpayer in this case was granted 24 months additional relief despite the fact that he clearly exceeded the 24 months before he moved into the property.

Most of The Property Is Used for your Business.

You own a four level property, and two levels house your business where six employees attend each day during your period of ownership.  You can’t claim relief on the whole property even though you and your family live on the other two levels.  However, you may be able to claim rollover relief or possibly entrepreneurs relief on the business proportion dependent upon the circumstances.

Inadequate Proof that a Property has been Rented Out

It is possible to get PRR if you leave a property for whatever reason and rent it out.  The relief is limited but, under average circumstances can still be valuable.  However, it remains incumbent on the owner to actually prove that they rented a property out during the period of ownership and, if the period of rental was (say) a decade ago, such proof may be hard to find.  Accordingly, it is important to retain records such as rental agreements to demonstrate that the criteria for the additional relief have been met.

Of course the above list is by no means exhaustive but HMRC has recently demonstrated an appetite for challenging PRR claims, often making assertions which bear no relation to the reality of the situation but which inevitably end up with a partial or full denial of relief and a significant tax bill.  As with all such issues, the advice to clients should be to plan in advance for anything that may be non-standard such as the intention to sell part of your land and for agents to ensure that they build in a question concerning the sale of the private residence (and land around it) into their end of year tax return questionnaire.


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For further information on this, please contact the Croner Taxwise consultancy team on 0844 728 0120 or email consultancy@cronertaxwise.com

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Senior Tax Consultant
0844 728 0120


Neil is the Team Leader for the consultancy team, managing a multi-disciplinary team dealing with Full and Aspect CT and IT enquiries, all aspects of Employment Taxes enquiries including National Minimum wage and written technical consultancy as well as undertaking consultancy on his own portfolio of clients. Neil has worked in tax for 30 years, starting in Customs and Excise and transferring over to the Inland Revenue. He has also worked in various practices including Grant Thornton and PWC and currently specialises in technical enquiry work.

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