Tax Tribunal Kicks Out HMRC Claims That 7 Days In Residence Is Too Short To Claim PPR Relief

Reply to the comment left by "Simon Lever" at "04/02/2017 - 16:57":

Very helpful Simon, thank you.
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I have read the detail of this tax tribunal case, and I have to say I think the chap involved was very lucky to get away with this. For a start, HMRC were already well out of time when they chose in 2013 to pursue him over not declaring his capital gain in his 2006 tax return, so they were already on a sticky wicket. They tried to claim he had deliberately misled them in his 2006 return, which allowed them to extend their period of investigation, and it can be hard to prove deliberate deception.

Nevertheless I had some sympathy with HMRC's position. The taxpayer's account of events was that he is a high-earning sole-trader mortgage broker based in Mayfair; he and his wife and two primary-school-age children sold up their family home in Hampstead after a burglary and bought a £4 million house in NW11 in June 2004. At the same time, they purchased a second property (the one of concern to HMRC) in SW3 for £1.05 million, supposedly with the intention of moving into that house once it was renovated as the father could then walk to work from it and it was the right size for their family.

The SW3 house was then renovated, and the family supposedly moved in in late November 2005 for six weeks, although 3 weeks of those were spent abroad on holiday. They had no evidence that they *had* actually moved in - for example photographs of their living arrangements, or confirmation from friends who visited them, or it appears even confirmation from their builders. They moved in with almost no furniture - they supposedly slept on futons, and used the already-fitted kitchen and bathrooms. The supposed reason for moving in early, before snagging and decoration was finished, was in order to give the wife more time to complete some delayed decisions over the final decoration, and to encourage the builders to press on and finish. They had discovered during the preceding renovation period that the wife was pregnant with their third child and she was now four months pregnant. It was apparently only during this period of very temporary-looking residence that they realised how "impractical" the new house was going to be with a young family: five flights of stairs, no separate space for the new baby's nanny, etc. They reflected on this during their skiing holiday and decided to abandon the idea of living in the SW3 house altogether, returning to the NW11 one when they returned from the holiday. None of the bills or council tax details had been changed, nor were either of the children's schools or GPs informed of the change of address: there was no documentary proof of residence at all.

This change of circumstances enabled the taxpayer. on the advice of his accountant, to issue a PPR election in favour of the SW3 house for just one week, then issue another PPR election to return to the NW11 one as the main family home. The SW3 house was put on the market a week later and was sold a month after that for £2.5 million, leaving the family with a nice fat £550K tax-free profit on the renovation.

All this narrative sounds mighty convenient for anyone wishing to transform this SW3 magically into a PPR, and thereby avoid over £200,000 in capital gains tax. One has to ask why the wife was incapable of spotting the five flights of stairs and the lack of a nanny flat beforehand. Did she really have to move in to spot these inconvenient facts? Would a family of such wealth, used to luxury and all mod cons, really agree to live off futons in an unfinished renovated house for three weeks, just to make some interior design decisions? Why did they buy the NW11 house, even though they supposedly didn't intend to stay there, rather than rent and wait for the right house in the right area to materialise? Why were no plans made that autumn to put the NW11 house on the market, if the SW3 house was really their intended home?

The taxpayer protested that a saving of around £200K in CGT was not a lot of money in his world, in comparison with the loss of his and his business' good name and potentially his brokers license, if he were to found to be evading CGT, and he was only following his accountant's advice. I think he had a good barrister and was prepared to put up with a lot of "heavy pounding" from HMRC demanding documents from all directions; HMRC apparently come down on you like a ton of bricks if you don't have at least a year's proof of evidence of actually living at an address (furniture, bills, friends invited round, etc). They try and ignore "elections" altogether as not worth the paper they're written on without accompanying evidence.

It was interesting to me that HMRC cannot actually demand that the taxpayer proves he was resident in a house he has elected as his PPR; it is up to HMRC to prove that he didn't, and in this case the Tribunal felt they could not prove the family hadn't "camped" in the SW3 house temporarily, as per the taxpayer's version of events. Not could they prove that the taxpayer knew what he was doing all along, and had therefore sought to deliberately falsify his tax return.

I suppose it is possible the taxpayer was telling the truth all along, in which case he probably felt very hard-done-by, being pursued by HMRC over 11 years later. But his version of events sailed very close to the wind, and it would be very hard for anyone so-minded to replicate this and get a PPR elected for just one week.

Reply to the comment left by "Tony Atkins" at "06/02/2017 - 17:12":

I agree with everything you have said but, nevertheless, important precedents have been set.

If a landlord sells their home, moves into a rental property and immediately put that home on the market they are in a strong position. This position is further strengthened if they have post redirected, change their driving licence and bank statements etc to the new address.
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Reply to the comment left by "Mark Alexander" at "06/02/2017 - 17:32":

I'm sceptical Mark, that the vast majority of landlords could get away with this. They would need a very strong - well, strongish, as in this case - narrative to explain why they needed to move into the rental property before selling it. This is especially tricky if the landlord has a spouse and children. This is just one case, and there are numerous other cases that have gone to Tribunal where the taxpayer has lost, despite many months of residence, bills in their name and so on, because the Tribunal agreed that their occupation lacked the necessary intended degree of permanence also required by precedent legal cases. It is a very murky area and simply "moving in" for a week and changing the bills before marketing the property is not going to be good enough.

Reply to the comment left by "Tony Atkins" at "07/02/2017 - 09:42":

I would accept your hypothesis if you could provide details of a case along the lines of the example you've given. However, I'm far from convinced that such a case exists.
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