A recent case has highlighted the importance of making an election is you own one or more properties. The facts of this case follow in very brief terms.
On 25 June 2004, the taxpayer and his wife bought a property in London NW11. On the same day, they bought, in his name only, a house in SW3. The latter required full renovation, which began in December 2004.
In March 2006, the couple sold the SW3 house and made a retrospective election under TCCA 1992, S.222 (5) to treat the NW11 property as their only or main residence with effect from June 2004. Seven days later, the taxpayer and his wife elected that the SW3 house should be their main residence from 19 December 2005. A further seven days later, they made an only or main residence election for the NW11 property with effect from 26 December 2005.
The taxpayer's 2005-06 self-assessment return did not show details of the sale of the SW3 property. In September 2013. HMRC wrote to the taxpayer to enquire if this may have been because the ‘incorrectly claimed private residence relief’ on the full gain so that no tax was payable.
During the enquiry, the taxpayer went on to explain that the family had moved into the SW3 property on 26 November 2005 and lived there for the weeks leading up to Christmas. However, on discovering that his wife was pregnant, they decided to move back to the NW11 house. Clearly, they had made the only or main residence election on the SW3 house to exempt the disposal from capital gains tax.
HMRC concluded the taxpayer had not occupied the SW3 property and that the proceeds were subject to tax. It issued a discovery assessment but the taxpayer appealed.
The First-tier Tribunal did not agree with HMRC‘s arguments. On its contention that the taxpayer had bought the SW3 house as an investment, the Tribunal said the fact that a property’s value was increased by refurbishment was ‘not necessarily an indication of an investment motive’. Any purchaser who improved a building would expect its value to be enhanced. The Judge accepted the taxpayer’s explanation that the property was to be renovated in preparation for use as a family home. The change of mind was due, in part, to changes in the family personal circumstances and could not be taken as motivation to realise a profit on an investment asset.
On HMRC’s argument that the taxpayer had not occupied the SW3 property, the Tribunal found the department had not shown on the balance of probabilities that the taxpayer and his family had not lived there as their private residence. Again, the taxpayer’s explanation was adequate.
There was no evidence to show that the taxpayer had deliberately avoided Capital Gains Tax. It was ‘inherently unlikely’ that the taxpayer would have ‘suddenly and uncharacteristically decided to bring about a loss of tax in a dishonest manner’.
HMRC had not succeeded in discharging the burden of proof that the taxpayer had brought about a loss of tax and the conditions for making an assessment out of time under TMA 1970, s 36(1A) were not satisfied.
The Judge added in his findings that the taxpayer had made a valid claim for only or main residence relief because it was not necessary for him to do so. More importantly, HMRC had not taken any action after receiving the elections in 2006 and began its enquiry in 2013 – over seven years later. In those circumstances it was for HMRC to prove deliberate conduct on the taxpayer’s part. It had failed to do so.
The taxpayer’s appeal was allowed.
The facts of this case were subject to scrutiny in the event that he taxpayer and his family moved into the property on 26 November 2005, sleeping on camp beds, and moved out six weeks later — and for three of those weeks the family were actually on holiday. But, as the Judge made clear, the case was about burden of proof. The discovery assessment was issued outside the normal time limits so HMRC had to demonstrate that any loss of tax was brought about deliberately.
HMRC had not managed to discharge that burden.
If the assessment had been raised within normal time limits, the burden of proof would have been on the taxpayer but the Revenue were dilatory in dealing with both the election and discovery assessment, which benefited the taxpayer.
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