Property continues to be a popular investment and a recent tax tribunal case illustrates why careful capital gains tax planning is so important for multiple property owners in the Surrey area. The case in point concerns a ruling by the tax tribunal against a couple – the Hartes – whose claim for capital gains principal private residence (PPR) tax relief was refused. This was in spite of the couple having submitted an election in favour of the property.
The reason HMRC took this stance was because there was insufficient evidence to show that the property was indeed their primary home, even though the owners had made an election to that effect. What can we learn from this case? If you own more than one property, what should you be aware of to minimise capital gains tax (CGT) if and when you do eventually sell?
Understanding how capital gains tax on property assets works
Before we go into more detail, it is worth understanding the basics of property related tax planning. When you sell a property which has been your main home throughout the period of ownership, no CGT is payable on the capital gains you make. If you sell a second property, CGT will however be payable on the gain (at the rate of 28% if you are a higher rate taxpayer). However where a property has not been your PPR throughout the entire period of ownership, but has been for part of that time, the last three years of ownership are exempt from CGT based on current rules. These rules apply irrespective of whether the property concerned was your PPR at any time during those last three years, and irrespective of the length of time during which the property was actually your PPR.
Unless you have made an election for a property to be your PPR for a period of time, whether it is or not will be a question of fact. Therefore it can be useful to make an election where a property is available for your use, but where you also have other properties available for your use. Indeed it is possible to ‘flip’ elections between such properties. However this case highlights that in certain cases an election will not be sufficient, and it demonstrates why property owners need to be able to provide evidence to support the fact that a property is actually used as their residence.
How not to treat a PPR election – lessons to learn
The Hartes owned two properties; one had been their home for many years, the other was inherited by Mr Harte after his father passed away, but was occupied by his step-mother for a number of years. After his step-mother moved from the property, Mr Harte transferred it into the joint ownership of him and his wife. They sold the property shortly afterwards, and later made an election to say it had been their PPR for the last 8 days of ownership. If accepted, this would have been sufficient to exempt the last three years of ownership from CGT. The election was not however accepted, as it was found that there was no reliable evidence to support the contention that the Hartes had spent periods of time using the property as their residence.
Evidence of occupation as a residence was outlined to be such things as:
- Having bills in their own name;
- Moving their own furniture to the property;
- Having friends and family to stay;
- Entertaining there; and
- Having work done on the property.
The lessons to be learned from this case are: if you own two properties you cannot simply make an election that one is your PPR and automatically expect the capital gains tax position to be favourable when you sell – it requires more. An election will only stand up if you can also demonstrate that you have occupied the property as a residence, and the onus is on the taxpayer to provide clear evidence to support the facts, especially when only short time periods covering residence claims are involved.
What to collect as further evidence to support a PPR election?
- Utility bills or letters addressed to you at the property;
- Receipts for payment of council tax and other bills;
- Electoral role evidence;
- Removal costs in moving furniture to the property;
- Photographs of yourself at the property at significant times and being active within the local community;
- In short, evidence that you have regarded the property as a ‘home’ and have used it as such.
To discuss property tax planning in more detail, email Anne Eager at ae@rjp.co.uk.