PRIVATE RESIDENCE RELIEF - 22.10.2020

Buying property in stages: a risk to tax relief?

Property purchase is an area in which HMRC is taking more interest and transactions that look out of the ordinary may attract unwelcome compliance attention. Why do clients buying multiple properties in stages run a particular risk?

HMRC data analytics

For capital gains tax purposes, private residence relief (PRR) is only allowed on one residence. Married couples and civil partners can only have one residence covered by PRR at a time.

But HMRC’s data analytic powers are increasing all the time, so if it notices from Land Registry data that an individual or couple has purchased a number of properties, it can suspect an undisclosed gain. With the increase in property prices, challenging PRR is good for HMRC and bad news for your clients.

Pro advice. Many individuals don’t fully understand restrictions on PRR, and think of it as a blanket exemption from CGT, as long as they just own one property and it’s their home. Consider a client letter to keep them straight on what’s involved, particularly in light of a number of tribunal cases that have gone in favour of HMRC.

Multiple purchase trap

Look out for clients involved in property acquisitions that look at all unusual, for example buying a number of properties to convert into a single private residence. Multiple purchases may legitimately be occupied as a single residence. But it can mean getting the detail right, and in the case of one family, HMRC successfully argued otherwise.

Tribunal case

In the case of White & Anor v HMRC [2019] TC07434 (see Follow up ), the taxpayers (W) bought four adjacent properties to convert into one residence. They started in June 2001, completing the first two purchases in July 2001. Another was completed in September 2001 and the final one in April 2002. There was a dispute as to the date they took up residence; it was somewhere between September and November 2003. Overall, the process from first exchange of contracts to actual occupation took around 27 months. On the eventual sale, HMRC challenged the PRR claim.

All the properties had been combined into one single residence, and HMRC didn’t challenge it based on the number of properties involved. What it went for was delay in occupation, and that was where the number of properties became critical. When did the clock run from and on which property? HMRC went for date of exchange of contracts, and it was the very first property that counted.

Depending on when the Ws’ occupation was held to begin (they couldn’t conclusively prove this) the delay was 27 or 29 months. This meant that the existing concession for delayed occupation could not apply and more than two years of the ownership period was chargeable.

Advising clients

It is preferable if your clients can ensure they take up occupation within 24 months. They should keep as much evidence as possible to back this up. However, if you do find HMRC challenging a PRR claim, check to see what date it is using. Following a Court of Appeal case in 2019, this should be the date of completion, not exchange of contracts. This might be enough to get a delay below the 24-month cut off.

Follow up   https://www.tips-and-advice.co.uk , Download Zone, yr.7, iss.6

Where a client purchases multiple properties to convert into a single dwelling, there can be problems proving exactly when occupation of the property began for private residence relief purposes. Advise clients that they should strive to keep any delay between completion and occupation below 24 months and keep evidence to show this.

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