A welcome feature of the new Tax Appeals Commission (“TAC”) is that written TAC determinations are now published on the TAC website.

In this article we look at a recent appeal heard by the TAC relating to principal private residence (“PPR”) relief from capital gains tax. Of particular interest is the quantum and sources of evidence provided by Revenue in support of its case and the analysis of these submissions by the TAC in reaching its determination to deny the relief.

Background

The appellant purchased an apartment in 1999, which he sold in 2002. He initially claimed PPR relief on the disposal but withdrew this claim as he was living with his parents and in a rented property during that time. The appellant acquired the relevant property (“the Property”) in March 2003 and asserted that he lived in the Property until its sale in December 2004. He claimed PPR relief on the gain arising from the disposal of the Property.

In 2007, the appellant was the subject of a Revenue audit where the issue of the disposal of the Property arose. Not content with the appellants claims that the Property was his PPR, Revenue raised assessments to income tax for the years 2003 and 2004 on the basis that the appellant was dealing in land. The appellant appealed these assessments.

Submissions

The appellant made a claim for PPR relief from capital gains tax under section 604 TCA 1997. The appellant submitted that he lived in the Property throughout the period of ownership as his main residence and was therefore entitled to PPR relief on the disposal.

Revenue contended that the appellant was engaged in dealing in land and raised assessments to income tax in accordance with section 640 TCA 1997, for the years of assessment 2003 and 2004. Revenue submitted:

• That PPR relief did not apply as there was insufficient evidence that the Property was the appellant’s PPR. Revenue’s evidence included:
  • During the period of ownership of the Property statements from two financial institutions were addressed to the appellant at his parent’s home address.
  • Phone and utility bills of the appellant, which Revenue contended were disproportionately low for a property that was claimed to be occupied as a PPR.
  • That for a substantial period of ownership the property lacked basic facilities such as a kitchen or central heating and as such was unsuitable for habitation.
• That the appellant was engaged in dealing in land. Revenue placed reliance on:
  • The loan agreement between the appellant and his father and a financial institution referred to “the Borrower is acting within a trade, profession or business of the borrower and is thereby not a consumer with the meaning of Section 2 of the Consumer Credit Act 1995”.
  • The rate of interest on the loan was based on variable commercial property rates plus 0.5%.
  • The loan agreement required the full repayment of the principal sum within 2 years.
  • The appellant having no obvious financial means to discharge the mortgage at the end of the 2-year period, which suggested that the property was acquired for speculative gain.
  • An article in a daily newspaper soon after the appellant had acquired the Property, in which the Property’s anticipated high-end finish was noted, and advertising that the Property would sell at auction.

Cross Examination of Appellant

When examined on the loan and his repayment capacity, the appellant confirmed that:

• The loan facility was approved in favour of him and his father. The term of the loan was interest only, for a term of 2 years and was to be repaid in full at the end of that term.
• The rate of interest was based on variable commercial property rates plus 0.5%. The stated purpose of the loan was to purchase and refurbish the Property.
• The loan agreement recorded that the appellant and his father were acting within a trade, profession or business.
• He was uncertain why a commercial mortgage was obtained, when the mortgage was intended (as claimed), for a PPR.
• The appellant was unclear as to how he would continue to make the loan repayments after the loan term expired, a time when the principal sum had to be repaid in full. He was not able to confirm how such a debt could be financed, specifically a business he ran was struggling financially.

Asked to comment on the low level of electricity consumed in the Property during a specific 6-month period, the appellant advised that he did not use much electricity and heated his living quarters with turf and briquettes. A review of the appellant’s bank statements showed that the appellant’s utility bills in a corresponding period prior to ownership of the Property were significantly higher.

The appellant was asked to comment on the article in a daily newspaper regarding the development and upcoming sale of the Property. The appellant noted that he realised the Property was in excess of his requirements and that he had decided to sell it.

When asked how he could live in a dilapidated house with no heating, the appellant contended that he was accustomed to living in period homes in various forms of decline. When he was a child, his parents had acquired several run-down properties and that he had grown up occasionally living in challenging conditions. As such the idea of living in a dilapidated property did not faze him.

Analysis by TAC

In reaching its determination, the TAC concluded that,

• The extensive and costly refurbishments undertaken during the appellant’s period of ownership:
  • Would have made habitation of the Property intolerable.
  • Makes it not credible that the appellant could live in the Property throughout the period of ownership given the lack of basic facilities.
  • Does not suggest that the Property was suitable for a young man whose only source of income was from a business in decline.
• The appellant failed to provide sufficient appropriate evidence to suggest any degree of continuity of occupation or that he occupied the Property as his only or main residence.
• The loan agreement with the financial institution clearly refers to the appellant and his father as “acting within a trade, profession or business of the borrower and is thereby not a consumer with the meaning of Section 2 of the Consumer Credit Act 1995.”
• It was significant that the rate of interest was that of a commercial loan and not a residential loan.
• The period of the loan was for a 2-year term and there was no strategy at the time of purchase to demonstrate how the appellant or his father could continue to discharge the loan.
• The low level of expenditure on utility services suggested that the Property was not inhabited and whatever expenditure was incurred was to facilitate the building and renovation work.

Findings

The very first determination by TAC made it clear that, “In tax appeals before the Appeal Commissioners, the burden of proof rests on the Appellant. The Appellant must prove his/her case on the balance of probabilities”.

The evidence submitted in this appeal supported the conclusion that the purchase of the Property was for a speculative purpose and not for occupation as a PPR. On this basis, TAC determined that the Property was acquired, renovated and subsequently sold in the course of a business carried on by the appellant and thus a change to income tax arose.

Conclusion

PPR relief is a relief commonly availed of by taxpayers. However, based upon the above it is essential that tax practitioners fully investigate a client’s claim for this relief in cases of doubt. The detail of the submissions presented by Revenue in this case provide careful food for thought and identify the key areas that should be considered. It is clear that Revenue are taking keen interest in claims for PPR relief given the generous nature of the relief.

Key evidence practitioners should seek from their client in cases of doubt include:

• Copy of any mortgage agreements relating to the acquisition of the property.
• Evidence of utility bills addressed to the client at the property.
• Clarification from the client as to their intention when they acquired the property, e.g. was it their intention to develop and sell the property?

From the analysis of the submissions by the TAC it is clear no single submission resulted in the denial of the relief in this case. Instead the TAC looked at each submission individually on their merits and based their determination on the balance of probabilities of all the submissions combined.

Mark Doyle – Director of Doyle Keaney Tax Advisors

Mark is a member of Chartered Accountants Ireland and an Associate of the Irish Tax Institute. He was formerly Tax Director with Grant Thornton where he worked for eight years.

Mark is the author of ‘Capital Gains Tax: A Practitioners Guide’ published by Chartered Accountants Ireland. Mark speaks extensively on tax matters for professional bodies and contributes to all the major professional journals and in the national press.

Email: mark@doylekeaney.ie

John Wilson

John is a Fellow Chartered Certified Accountant and an Associate of the Irish Tax Institute with over ten years experience across private practice, industry and public sector. He recently joined Doyle Keaney Tax Advisors having spent two years with Revenue’s Audit Compliance 2nd Tier/MED team.

In 2019 John has been co-opted to the Practitioners’ Panel of the ACCA and contributes on tax matters in professional journals.

Email: john@doylekeaney.ie