This month’s Chartered Accountants Tax Case Digest takes a look at a case where HMRC denied principal private residence (PPR) relief on the basis that there was not the requisite degree of permanence or quality of occupation of the relevant property by the taxpayer.

Background

The Appellant, Mr Yechiel, purchased 6 Beaufort Drive in September 2007 with the intention that it would be a family home for him and his fiancée. The house was a 15 minute walk away from his parents’ house. When Mr Yechiel bought the property it needed a significant amount of work and so he applied for planning permission to extend it.

Whilst the application was in progress, the property was let out. Planning permission was granted in March 2008 and Mr Yechiel and his fiancée married in August 2008. In January 2011 his wife instructed divorce lawyers. In April 2011 Mr Yechiel moved into 6 Beaufort Drive. In October 2011, Beaufort Drive was advertised for rent and for sale in October 2011. In December 2011 Mr Yechiel moved in with his parents.

Mr Yechiel’s parents confirmed that they were a very close family and that they wanted him to move back with them when his marriage broke down, but Mr Yechiel chose to move to 6 Beaufort Drive and then only after persuasion moved in with them later. Evidence and witnesses were presented that Mr Yechiel lived at 6 Beaufort Drive for the period stated.

The completion statement for the property showed a significant mortgage on the property at the time it was sold. The property was sold for just over £1.2m, having been purchased for £605,000. Mr Yechiel explained that as it was an interest only mortgage he was able to make the monthly payments. In his witness statement he explained that when he split with his wife, 6 Beaufort Drive was the only home available to him. He did not want to move back to his parents’ house as he comes from a conservative Jewish heritage where divorce is seen as a big event. He was also too embarrassed to go to his parents.

The house was in an area that he knew and liked and was both near his parents and a five-a-side football team he played for. It also suited him, as he had chosen the features of the house, wanting it to be the family home. Mr Yechiel explained that he had two intentions when he moved into 6 Beaufort. The first was to use it as an escape route; it would allow him to get away from the stress of his divorce. The second was to use the house as a long term home. Mr Yechiel stated that from April 2011 to July 2011, he slept there every night. He bought a bed, and a second-hand side table. The rooms had built in cupboards. He used the kitchen for basics, though he didn’t cook there because of his state of mind at that time: cooking for himself alone was not fun. He either ate at his parents or had a takeaway. He received post at 6 Beaufort; usually random junk mail, with the occasional bill. Bills for utilities were low, as he was only really using the master bedroom and the kitchen. He took clothes to his parents’ for washing.

Mr Yechiel stated that he tends to live in quite a spartan way and does not own many possessions when he is on his own. Mr Yechiel also explained that he has dyslexia and was disorganised with paperwork, hence he sometimes got behind, for example in notifying relevant parties of a change of address. In oral evidence, Mr Yechiel was found to be honest and straightforward.

He set out honestly that when he moved in, his life was in a significant state of upheaval, and he was unsure what he was going to do, both where he was going to live and what he would do with the property.

In the period October to December 2011, he came to realise, both financially that he would need to sell the house, and emotionally that his parents’ house was ‘warm and supportive’ and would provide him with the support he needed.

Mr Yechiel claimed PPR in respect of the disposal of 6 Beaufort Drive. HMRC denied relief. They did not consider the appellant to have evidenced, to a significant degree of permanence, his residence in the house. HMRC questioned the intention of Mr Yechiel, both at the point of purchase of the property, and at the point of moving in. At the point of purchase, HMRC’s view was that if Mr Yechiel’s fiancée did not like a similar house on an adjacent road, then it was strange to think she would like this property any better.

At the point of moving in, they questioned the nature of the intention to use it as a home, particularly given it was marketed for sale and for rent within 6 months. They pointed to the fact that Mr Yechiel was never on the electoral role at the property, and also to the fact that Barnet Council told them the property was vacant, as evidence that Mr Yechiel did not intend the property to be his long term home and thus his occupation of 6 Beaufort Drive did not have the necessary quality, in the round, to constitute residence.

Mr Yechiel appealed against this decision.

Decision

The appeal was thus to consider whether the property occupied by the Appellant in 2011 qualified for PPR relief. The relevant legislation is set out in sections 222 and 223 TCGA 1992. The point at issue was whether 6 Beaufort Drive was, for the purposes of this legislation, Mr Yechiel’s ‘only or main residence’.

The Court of Appeal, in Goodwin v Curtis [1988] sets out ‘it is important not to construe the case stated with too microscopic a degree of precision..... there must be some assumption of permanence, some degree of continuity, some expectation of continuity to turn mere occupation into residence’.

The question of when occupation becomes residence is one of fact and degree for the Tribunal to decide as there had been no contention that Mr Yechiel did not occupy the property.

The question before the Tribunal was therefore whether the occupation of 6 Beaufort Drive had the necessary quality, in the round, to constitute residence. The Tribunal did not consider the fact that Mr Yechiel’s name was not on the electoral role at the property to be of any particular significance. Mr Yechiel is dyslexic and not very organised with paperwork, and in addition he was in the middle of a divorce. There were no national or local elections during the period, so the electoral role did not presumably take on any particular significance during that period of time.

Likewise, the Tribunal did not consider the council tax position to be significant either way. The fact that Barnet told HMRC that their records showed the property as vacant during the period was clearly a mistake, as the council tax paid by Mr Yechiel had no vacancy discount, and he has said he told the council he was living there. As mere occupation would be relevant for council tax, this was clearly the right thing to do but is not by itself determinative of intention to remain their long term.

Mr Yechiel’s intentions at April 2011 were clearly important. However, to his credit, he was clear that at that point he had no very clear intention. Whatever the intention of Mr Yechiel when he moved into the house, it was also striking what he did in the house, and more importantly what he did not do.

The Tribunal considered that as well as occupation (which clearly happened) and intention to occupy for a time with a reasonable degree of permanence (about which the point seems to be finely balanced), ‘quality’ is determined by what the Appellant actually did in the house.

The Tribunal considered in the round that the facts of short period of occupation, minimal use of the house other than for sleeping, coupled with use of another house [that of Mr Yechiel’s parents] for eating, laundry and social connection, together with the lack of evidence of a firm commitment to living in the house long term, and the financial reality that this did not appear possible, means that the residence did not have sufficient ‘quality’ for the property to qualify as an ‘only or main residence’.

For the reasons given above, the appeal was dismissed. The property did not qualify for PPR and hence not for ‘Lettings Relief’.

The full judgment in this case is available from:- http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j10794/TC06829.pdf