Massive capital gains tax - private residence relief case

MEsteve

My parents are concerned because they have been hit with a large tax bill relating to a house they had in London and recently sold. The house was inherited as a trust and provided as a residence for my parents from the early 80s. However my father worked in the racehorse business and his job had him living on racehorse studs for most of our lives. For this reason we applied for 'private resident relief' to be taken account on the capital gains made on the sale of the house. As I understand it this is a releif in place for cases like this where you have a house as part of the job where you have to live. Apart from the Stud business the army is another example of this situation.

We have paid £17,000 tax so far which seems fair because it accounts for the times in between stud jobs that my father lived on a farm off the stud - in between stud jobs. The London house was usually under a tenancy agreement during these periods.

However the HMRC are still chasing a further £40,000. According to this tax relief rule there needs to be a time before and after the period of absence when the residency in question was lived in as a primary residence. What should have happened is that we should have let them know the situation as well as detailed time spent there at the start.

There have been times between tenants and doing the place up - but it was such a long time ago. What I need to know is what evidence would be needed? The landlord who dealt with the letting early on has ceased to exist years ago...

We have spent money on a tax lawyer who suggested the HMRC might flag this up but at that time the level of detail was not required because it seemed satisfactory. However we will probably need to spend more money now this new part of the saga has revealed itself...

I suppose I was wondering if anyone had any knowledge in this area...

jimmo

I am afraid I find your post quite confusing so please forgive me if I go over ground you already understand.

Periods when your father worked and lived on racehorse studs are likely to be periods of occupation of job related accommodation.

http://www.hmrc.gov.uk/manuals/eimanual/EIM11351.htm

Those periods then become periods of deemed occupation of the dwelling house.

http://www.hmrc.gov.uk/manuals/cgmanual/CG64477.htm

They are therefore periods of occupation, not periods of absence.

Periods of absence will then be periods when he was living elsewhere.

It then seems likely that the pattern of occupation was something along the lines of:

Period of occupation (actual or deemed)
Period of absence (1)
Period of occupation (actual or deemed)
Period of absence (2)
Period of occupation (actual or deemed)
Period of absence (3)
Sale of property.

In that example Periods of absence (1) and (2) are qualifying periods of absence because there was occupation or deemed occupation before and after the period of absence.

Period of absence (3) is open to doubt unless he was prevented from returning to the property by his employment.

http://www.hmrc.gov.uk/manuals/cgmanual/CG65050.htm

As regards “time between tenants and doing the place up” these seem very likely to fail the “quality of occupation” test.

Moving in to do the place up between lettings lacks the required degree of permanence or continuity.

http://www.hmrc.gov.uk/manuals/cgmanual/cg64460.htm

Turning now to your actual question regarding evidence I would suggest that, on the face of it, trying to produce evidence that the family, not just your father, occupied the property for short spells “between tenants and doing the place up” could prove to be very difficult and could well be futile. After all, a few weeks in 30+ years is a drop in the ocean.

In my days at HMRC we didn’t require tremendously detailed evidence so much as a believable story which fits in with what we already knew about the taxpayer.

However this is all about detail and the degree of help you can expect from a forum depends on how much you are prepared to share.

I don’t mind asking the questions as long as you are prepared to answer.

John_Pierpoint

There is little logical or "fair" about tax, it is just a mish mash of rules piled on rules by HMRC trying to do what politically pressured politicians and court cases decide.

This is a bit confusing:The house was inherited as a trust and provided as a residence for my parents from the early 80s.

Who owned the property and when/why did the arrangement change:
ie "from 19xx thru October 1980 John Smith & Jennifer Jones as trustees of....................trust.
October 1980 thru xxxxxxx 2010 Mr & Mrs Bloggs in fee simple.

Exactly who sold it?
Was it registered at the Land Registry prior to this sale?
Who currently owns the proceeds of sale?

xylophone

The house was inherited as a Trust

Are you able to give additional details?

MEsteve

jimmo wrote: »

I am afraid I find your post quite confusing so please forgive me if I go over ground you already understand.

Periods when your father worked and lived on racehorse studs are likely to be periods of occupation of job related accommodation.

http://www.hmrc.gov.uk/manuals/eimanual/EIM11351.htm

Those periods then become periods of deemed occupation of the dwelling house.

http://www.hmrc.gov.uk/manuals/cgmanual/CG64477.htm

They are therefore periods of occupation, not periods of absence.

Periods of absence will then be periods when he was living elsewhere.

It then seems likely that the pattern of occupation was something along the lines of:

Period of occupation (actual or deemed)
Period of absence (1)
Period of occupation (actual or deemed)
Period of absence (2)
Period of occupation (actual or deemed)
Period of absence (3)
Sale of property.

In that example Periods of absence (1) and (2) are qualifying periods of absence because there was occupation or deemed occupation before and after the period of absence.

Period of absence (3) is open to doubt unless he was prevented from returning to the property by his employment.

http://www.hmrc.gov.uk/manuals/cgmanual/CG65050.htm

As regards “time between tenants and doing the place up” these seem very likely to fail the “quality of occupation” test.

Moving in to do the place up between lettings lacks the required degree of permanence or continuity.

http://www.hmrc.gov.uk/manuals/cgmanual/cg64460.htm

Turning now to your actual question regarding evidence I would suggest that, on the face of it, trying to produce evidence that the family, not just your father, occupied the property for short spells “between tenants and doing the place up” could prove to be very difficult and could well be futile. After all, a few weeks in 30+ years is a drop in the ocean.

In my days at HMRC we didn’t require tremendously detailed evidence so much as a believable story which fits in with what we already knew about the taxpayer.

However this is all about detail and the degree of help you can expect from a forum depends on how much you are prepared to share.

I don’t mind asking the questions as long as you are prepared to answer.

jimmo thank you so much for your helpful post here - and thanks to the others. It was a bit of a slow start and I got distracted - just came back to check.

jimmo - your post leads me to understand that because we lived on a racehorse stud as required - then that counts as 'deemed residence' - and thus a period of occupation. However - is this relevant to Capital Gains Tax?

For our Captal Gains Tax case the HRMC has requested the extra money due to Condition A and Condition B of this:

http://www.hmrc.gov.uk/manuals/cgmanual/cg65046.htm

so according to your table - it seems to me they require a period of 'actual' occupation in order to qualify for tax relief on the periods of 'deemed occupation'...the period of 'absence' are the short periods where we lived in the area of work but not mandatory Stud accommodation - and thus subject to taxation.

This HMRC letter I have here says:

From the information provided I cannot see that you have ever occupied the property as your own or main residence. Our Guidance at CG65046 clearly states that in order for the trustees to claim Principle Private Residence Relief in respect of job related residency elsewhere, there must have been a time during which the dwelling house was the individual's only or main residence.

From what you have told me - Im starting to feel confused by Living Accomodation Exemption - and the 'Job Related' clause of Private Residence Relief....

xylophone

Was this property actually owned by your parents as private individuals or as trustees of a trust?

Or do you mean that your parents were beneficiaries of a trust?

MEsteve

xylophone wrote: »

Was this property actually owned by your parents as private individuals or as trustees of a trust?

Or do you mean that your parents were beneficiaries of a trust?

hi - thanks for the response...the reason Ive not gone into the trust side is because firstly I dont fully understand it - but also the HMRC basically said its not an issue in this case - its equivalent to my father owning the property as far as tax is concerned...

thats weird - I could have sworn there was a reply from jimmo I saw late last night...

Pennywise

Back to basics, what periods did you parents actually "live" in the house. Forget "deemed" occupancy etc., we need to know the periods when they were physically living there.

As far as I understood the rules, you actually have to live in the house before and after the period whilst you live elsewhere due to work for the intervening period to be regarded as your "home" for tax purposes.

If they didn't physically live in the house before and after they lived elsewhere for work, then I think they may have an uphill battle to claim private residence relief at all.

MEsteve

Pennywise wrote: »

Back to basics, what periods did you parents actually "live" in the house. Forget "deemed" occupancy etc., we need to know the periods when they were physically living there.

As far as I understood the rules, you actually have to live in the house before and after the period whilst you live elsewhere due to work for the intervening period to be regarded as your "home" for tax purposes.

If they didn't physically live in the house before and after they lived elsewhere for work, then I think they may have an uphill battle to claim private residence relief at all.

Hi thanks Pennywise - I think you are right - you have to live in the house. we lived right at the start when we bought it - with the intention of staying in London and finding a new career - however work-wise it didnt work out - so after only a few months - we had to move back out to the Stud...we actually found a utility bill from the move date which I hope will be helpful. But I am worried that we did not live there long enough.
It turns out there were a couple of other times we moved back there but again only for a few months...

jimmo

MEsteve wrote: »

thats weird - I could have sworn there was a reply from jimmo I saw late last night...

There was, but I was not happy with it and decided to take another look today.

I see that things have moved on today but continue to believe you have a case for arguing that a deemed occupation is good enough for establishing a period of absence. If, as seems to be the case here, HMRC are arguing that actual, physical occupation is essential then it may be time to move on and look at the legislation.

Section 222(8) Taxation of Chargeable Gains Act 1992 actually says “….this section and sections 223 to 226 shall apply as if the dwelling-house or part of a dwelling-house were at that time occupied by him as a residence.”


http://www.legislation.gov.uk/ukpga/1992/12/section/222/enacted

So, for the purposes of sections 223 to 226 only the person living in job related accommodation is treated as if he were living in the property that is subject of the claim.

Note that the legislation does not use the word deemed and it make no provision to differentiate between actual occupation and what we are now referring to as deemed occupation.

Moving on to section 223(3) in the final paragraph it says “( a period of absence)shall be treated as if in that period of absence the dwelling-house or the part of the dwelling-house was the individual’s only or main residence if both before and after the period there was a time when the dwelling-house was the individual’s only or main residence.”
http://www.legislation.gov.uk/ukpga/1992/12/section/223/enacted
Again there is no reference to actual occupation in the legislation and the question is “ was the property the individual’s only or main residence?”

The answer is “Yes, by virtue of section222.”


Just to stress the point, there is, in my opinion, absolutely, no requirement for actual occupation. Deemed occupation, once established, counts as actual occupation.

Incidentally, in post #5 you said “Im starting to feel confused by Living Accomodation Exemption - and the 'Job Related' clause of Private Residence Relief.…”

I don’t follow that. Is it starting to become clear or can you expand?

MEsteve

Hi jimmo thats a very interesting angle thanks for taking the time on this its great...One thing Im confused by is that if this is in fact the case - why would this guy be chasing us insisting that we did actually live there in order to qualify?

I spent some time reading various helpsheet on the HMRC website and I have read quite a bit online now where it says in order to qualify for PRR on capital gains tax - one has to have lived at the property as the main residence. It seems odd to me that it doesnt specify that the 'job related accomodation' clause makes this not necessary...

I have to say after what the guy from the HMRC pointed out with that link I posted, what Id read on the internet - I just couldnt understand how PriceWater House Cooper, who we paid to calculate our tax exposure, made no mention of the neccessity to give details on when we lived in the property which now seemingly has put our claim in severe jeopardy...and it looked like in fact we may have to pay £100,000 CGT given that the HMRC were now saying the claim for PRR was not valid. So we were liable a full 28% on the sale even tho it was our only property for all this time. In our correspondance PWC merely stated that the intention to live at this one property was the important issue. If in fact it is the case that this guy at the HMRC is incorrect - well - isnt this a bit weird?

What Im confused by I suppose is how all these 'sections' are related to what is set out in the capital gains tax section of the HMRC pages for the reader like me. For example this argument with regard to deemed and actual - I had read the main relief was PRR and there didnt seem to be any mention there saying 'if you live in job related accommodation that is equivalent to an actual accommodation in the primary residence relating to the relief'...as you have showed....

And Im still finding it hard to believe they would chase us for this when as you point out - according to the legislation - its not a requirement...?! Does this guy handling our case not understand the tax law?