One of the most frequently questions a tax adviser gets asked is “how long do I have to live in a property before HMRC will accept that it is my “main residence” and thus exempt from capital gains tax when I sell it?” The question is fair but the answer is difficult…
My own opinion is that there is no minimum period of time, and I give the example of someone who moves to a new city to take up a job and buys a small flat to live in. He moves in and starts the job but a week later he wins millions on the lottery. He resigns from his job, spends some of his winnings on a world cruise, and on his return he sells the small flat and buys a country house.
He only spent a week in that flat, but I defy HMRC to argue that it was not his “only or main residence” during that time, and thus exempt from capital gains tax (CGT) on any gain he might make when he sells it. The point is that he actually lived in the flat, and (until his lotto numbers came up a week later) he regarded it as his home.
HMRC, who seemingly make up the law as they go along, have for a long time tried to introduce the concept of a “temporary” residence, which does not qualify for exemption from CGT. There is no reference to “temporary” in the legislation but this has not deterred them from using a short period of occupation as a reason to seek to deny relief for a “main residence”.
Favell v HMRC
A recent Tax Tribunal case (Favell v HMRC) has at last thrown some light on the subject. Mr Favell sought exemption from CGT on a property he claimed to have lived in from January 2001 to August 2001 (or November 2001 – he was not very clear on the dates).
He did not make a convincing case – he had no utility bills or other correspondence addressed to him at the property concerned and the witnesses he called were curiously vague about when he had been living there. HMRC attacked on two fronts: they argued that Mr Favell had not in fact occupied the property at all, but they also argued that:
“Even if the Appellant had stayed at the property between January 2001 and August (or November) 2001 Mrs Riley argued, in the alternative, that the Appellant’s occupation of the property was of a merely temporary nature and was not sufficient to constitute “residence” for the purposes of s. 222 TCGA 1992”
The Tribunal found against Mr Favell, but they reached this conclusion on the basis that they did not believe he had ever lived at the property. They then went on to say:
“Moreover, if the Appellant had been able to demonstrate that he had occupied the property from January to August 2001 we would have been minded to hold that such occupation would have amounted to residence for the purposes of s.222 TCGA.”
Because the Tribunal did not believe Mr Favell had ever lived at the property, their remarks about the period of time were not part of the reason for their decision – to use the legal jargon, they were “obiter dicta” (things said by the way) rather than the “ratio decidendi” (reason for the decision), and as such have less legal force. It is also the case that a Tribunal decision is not binding on other Courts in the way a decision by the Court of Appeal or the Supreme Court is.
Nevertheless, the Tribunal went out of their way to take a swipe at HMRC’s invented notion of “temporary residence”, and anyone arguing such a case with the taxman should quote the case to him and point out that there is no reason to suppose that another Tribunal would take a different view.