Principal Private Residence Relief – Prove it or Lose it


The Capital Gains Tax (CGT) reliefs for property owners are surprisingly generous in the UK and provide a variety of tax planning opportunities. The rather beneficial tax regime is probably why many people think that the ability to make an election that a property is your ‘principal private residence’ (PPR) is purely a matter of routine.
However, the availability of PPR relief is, as a taxpayer discovered recently, a matter of fact and, when challenged, must be substantiated.
The property in question was a flat in South London, which had been bought in 1999 and sold in 2004. During the intervening time it was let, but the owner, who was self-employed and filed tax returns annually, neglected to declare the rental income on the returns.
The gain on sale for tax purposes amounted to more than £70,000. The taxpayer contended that for part of the time of ownership, it had been his PPR, which meant that more than £50,000 of the gain would not be subject to CGT. He also claimed a further relief that applies when one’s PPR is let for a period of time, with the net result that he claimed that no CGT was due.
The response of HM Revenue and Customs (HMRC) was ‘prove it’. The First-Tier Tribunal found that the man had ‘not discharged the burden of proof required to demonstrate that he occupied the property as his only or main residence during 2001 or at any other time. There is a complete absence of objective documentary evidence to show that the Appellant resided at the property’.
The result was that the man now faces a CGT bill on the gain, and the related costs of the legal battle.
HMRC take a tough line when they suspect tax due has been evaded. Recently, it was revealed that HMRC had undertaken a criminal investigation into an accounting firm and written to the clients of the firm to advise them that they were inviting them to make a full disclosure of their tax liabilities.
Says <<CONTACT DETAILS>>, “In this case, HMRC clearly had a bone to pick with the taxpayer. However, any claim for tax relief must be able to be substantiated. If you are considering buying a second property, it is essential to understand the tax issues.”
Partner Note
1. Favell v HMRC, UKFTT 360.
2. Reported in Taxation, 12 October 2010.

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