Many countries charge the equivalent of Capital Gains Tax (CGT) on the profits made when a person’s private residence is sold. The UK does not. In addition, the availability of an election as to which residence is to be treated as the ‘principal private residence’ allows considerable scope for tax planning for owners of more than one residential property.

HM Revenue and Customs (HMRC) are quick to raise tax assessments on profits on sales of such properties when it is suspected that the criteria for making a valid election have not been met.

Recently the First-tier Tribunal (FTT) heard such a case. It involved a property that was purchased by a couple in 1999 and sold for a profit of more than £80,000 in 2005. They also owned a four-bedroom house in which they lived until October 2004.

The property purchased in 1999 was let until late 2004, at which time an election was sent to HMRC opting to make it the couple’s principal private residence. This was acknowledged by HMRC.

After the sale of the property, HMRC commenced an enquiry and concluded that CGT of nearly £10,000 was payable by the wife and the estate of her (now deceased) husband. The case turned on ‘whether the appellant’s occupation of a property in the period October 2004 to March 2005 deems that property to be a “residence” for the purposes of a claim for principal private residence relief’.

HMRC accepted that the property was used as a residence by the couple, but disputed whether it could be said to be their main residence. The admission was fatal to their claim. Once it was accepted that the property was used as a residence, the election as to which of the couple’s two properties was to be treated as their main residence was up to them. Section 222(5) of the Taxation of Chargeable Gains Act 1992 states that ‘So far as it is necessary for the purposes of this section to determine which of 2 or more residences is an individual’s main residence for any period… the individual may conclude that question by notice to the inspector’, provided certain conditions are met.

As this is what had happened, HMRC’s case was dismissed.

This decision will comfort owners of second properties seeking to make use of the election. Once the fact that the second property has been used as a residence has been established, a valid election will determine that it is the principal private residence.

It should be noted, however, that there are increasing numbers of cases in which HMRC are attacking (usually successfully) such elections where the use of the second property as a residence cannot be established.


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