Bailey: Quality trumps quantity as Tribunal grants taxpayer principle private residence relief

In Stephen Bailey v HMRC [2017] UKFTT 658 (TC), the First-tier Tribunal (FTT) granted the taxpayer principle private residence relief, under section 222, Taxation of Chargeable Gains Act 1992 (TCGA), despite him having only occupied the property in question for two periods of less than six months.

Background

In February 2008, the taxpayer acquired a property in Richmond (the Richmond property) through his property company, Landseers Ltd, for £420,000. The property was purchased by the company with the assistance of a three month bridging loan. 

At this time, the taxpayer was living with his children at a property in Maidstone, which he owned jointly with his partner (the Maidstone property).

The taxpayer sought a personal mortgage in order to finance his purchase of the Richmond property from the company. While seeking a mortgage, the taxpayer transferred some of his furniture from the Maidstone property to the Richmond property.  The taxpayer and his children lived at the Richmond property for two and a half months while he sought a mortgage. 

Due to the financial crisis of 2008, the taxpayer was unable to obtain a normal mortgage and was only able to secure a 'buy-to-let' mortgage. If he had not obtained such a mortgage, the company would have defaulted on its bridging loan and the Richmond property would have been repossessed by the lender.

The taxpayer purchased the Richmond property from the company on 2 May 2008 for £429,000 and let it to a close friend in accordance with the terms of the buy-to-let mortgage. The taxpayer then lived with his partner in a property she owned in Tachbrooke.

When the tenant of the Richmond property died, the taxpayer moved back into the property, intending to make it a home for his family. However, within a few weeks, the taxpayer realised that because of various mental health issues he was unable to cope with living in the house and he decided to sell it. The property was sold on 31 August 2010 for £550,000, realising a gain of £121,000.

The taxpayer claimed that no capital gains tax (CGT) was due on the basis that he was entitled to principle private residence relief under section 222, TCGA, which excludes to charge property that is an individual's main residence. 

HMRC argued that there was no evidence that the taxpayer had occupied the Richmond property as his main private residence during his ownership of the property and issued a discovery assessment under section 29, Taxes Management Act 1970, claiming CGT for the year 2010/11, in respect of the taxpayer's disposal of the Richmond property. The taxpayer appealed to the FTT.

FTT decision

The taxpayer's appeal was allowed.

Applying sections 222(1)(a) and 223 (in the form in force at the time) TCGA, the FTT considered that as the taxpayer had owned the Richmond property for less than three years if he had occupied the  property as his 'only or main residence' at any time during that period of ownership, the relief would be engaged. 

The FTT found that the taxpayer had occupied the Richmond property for two short periods (two or three months in each case). On both occasions he had intended the property to be the family home. The taxpayer was forced to move out of the property due to circumstances beyond his control. The FTT took into account the fact that the taxpayer let the property to a close friend and attempted to move in again once the property was vacated following the death of the tenant. 

Notwithstanding the short periods involved, the FTT was satisfied that at least part of the taxpayer's occupancy had the required degree of 'permanence, continuity or expectation of continuity', for it to have been his 'residence' for the purposes of section 222, TCGA. 

The FTT confirmed that it is the quality, rather than the quantity, of occupation which matters and that there is no minimum period of residence for the relief to apply. The period of residence need only have an assumption of 'permanence, continuity, or some expectation of continuity' (Goodwin v Curtis [1998] STC 475).

Comment 

This case is a useful restatement of the necessary criteria which must be satisfied in order for principle private residence relief to be applicable under section 222, TCGA. Although the taxpayer had occupied the property for two short periods of time, it is the quality and not the quantity of occupation which matters when considering the relief. 

This case follows the decision in Richard James Dutton-Foreshaw v HMRC that resulted in a similar outcome for the taxpayer. Our blog on that decision can be found here. 

A copy of the Bailey decision can be found here.