Going all around the houses, for nothing
A regular example of things going wrong is
claiming to be tax exempt when you sell your dwelling at a profit. Many people think that to occupy a property as a dwelling is enough to get this “
Main Residence Relief”.
A tax judge considered this again quite recently where a property had only been occupied for a short period of time. Mr and Mrs Lam were an elderly couple who had sold their property and moved into a rental property. After a year of living in rented accommodation they decided to purchase a two-bedroom bungalow. It’s the bungalow that caused the problem.
After a few months of living in the bungalow Mrs Lam submitted a planning permission to their local council for roof alteration, two further bedrooms upstairs and converting the downstairs into an extended kitchen and a family room. The council agreed. It was intended that they would move into the property upon completion of the alterations.
They did for a short while, reside in the property during the week and would return to their flat each weekend to be near their children.
When Disaster Strikes, Circumstances Change
After bad weather the bungalow roof collapsed making it unsafe and uninhabitable for Mrs and Mr Lam to reoccupy. Building work took longer than expected. During this period, Mr Lam had a stroke and was treated at a hospital near their rented property. The property was close to their daughter who was a nurse. Upon completion of the alterations to the bungalow, it was sold at a profit. It was argued by the taxpayer that due to the domestic setbacks at the property and the medical treatment needed by Mr Lam, this changed their plans about what to do with the property.
Nothing was done for tax, on the basis that the property was intended to be their main residence and they resided in the property, albeit a short period of time therefore it would be subject to main residence relief.
With a successful claim, the period of occupation would be exempt followed automatically by the last 18 months which is exempt if the property had been the main and only residence at some point during its ownership. The phrase used was “a dwelling – house or part of a dwelling house which is or has at any time in the period of ownership been, his (or her) only or main residence”.
It was argued by the Lams that there is no minimum period of occupation required for an individual to establish a residence. A helpful and important principle. But HMRC said that Mr and Mrs Lam moved into the property with just two sleeping bags.
A Temporary Solution Led to Permanent Headaches
The Lams did not install any furniture, kitchen equipment or personal possessions such as would have been essential for them to actually live in the property.
No evidence had been provided of a change of address, television licence or
registered doctor. This implied the move was not permanent and so they had never managed to establish the bungalow as their main residence. It’s not an unreasonable position to take.
Without such evidence and in the absence of a special tax election to claim the bungalow as their main residence, the appeal was refused.
The clear message is that the Lams failed to demonstrate their original intention to occupy the property as their main residence. If they had moved in with all the things we associate with setting up a permanent home, changed their address etc, their story could have been very different.
It wasn’t the fact that they’d changed their intentions, either, that lost the case-leading tax cases have allowed a person to change their intentions but
demonstrating the original intention is one of the key factors to getting this tax relief.
To Claim Main Residence Relief
If you “live” in more than one dwelling and you own both on a long lease or freehold, you should take advice if you are uncertain. This includes making use, possibly, of the special tax election that was overlooked in the above case.
This case had an outcome that some might say was cruel. Mrs Lam was elderly and caring for Mr Lam who suffered from Parkinson’s disease. Tax is never sentimental. And, quite often, it may not seem to be “fair”.
A very good reason to give yourself the best possible chance. Please
contact us if you would like advice.
