Archives for posts with tag: CGT

Main Residence Problem?

After a winter break we’re going to look at recent developments we ought to be aware of.  The first of these relates back to an earlier podcast in November 2011 when I looked at the very important main residence relief for capital gains tax purposes.

It is noticeable that over the last few years the revenue have been looking at taxpayers trying to claim the benefit of this exemption and challenging their entitlement.  In many of these cases it is quite clear that the taxpayer had never genuinely occupied the property as a residence and so the revenue were quite right to deny the relief.

However in one recent case it seems that a taxpayer who, I believe, should have been given the benefit of the relief was denied it – and that is a worrying development.

In the earlier podcast  I explained that to be able to claim that a property is your residence you need to reside in it, obviously enough and also pointed out that the courts often looked at a comment made by the judge in the Curtis v Goodwin case which is one of the most significant judgements in this area – the judge commented – “the principle is that in order to qualify for the relief a taxpayer must provide evidence that his residence at a property showed some degree of permanence, some degree of continuity or some expectation of continuity.”

That podcast looked at the position of two taxpayers, a Mr Favell and a Mr Metcalfe, both of whom had signally failed to show that they had resided in the properties in respect of which claims were being made by them.  Favell claimed that he had separated from his partner and so moved into another property that he owned for a period of eleven months.

Although the tribunal judge was quite happy that eleven months was a sufficient period of time to constitute a residence there was no evidence that Favell had genuinely lived there – the claim was rejected.

Metcalfe claimed to have bought a flat ‘off-plan’ which he sold 4 months later – he claimed that his girlfriend didn’t like the property and although he moved in he sold it shortly afterwards having already placed the property on the market.  Again there was little evidence that he had ever occupied the property as his residence, he had no phone connection, no TV license either and the utility bills were suspiciously low.

Neither Favell nor Metcalfe made the election discussed in my December 2011 podcast to determine which property was the main residence, so the Tribunal had to judge whether a property was the main or only residence in fact.

Now we come to the recent case which concerns a woman called Susan Bradley [Bradley v HMRC – http://tinyurl.com/cpwnay8].  Be careful not to confuse this with an earlier case reported in January 2011 concerning a woman called Alexandra Bradley – no relative I think – who I also referred to in the earlier podcast.

Susan was married but the relationship with her husband was getting worse and so in August 2007 she decided to leave him and seek a divorce after two years separation.  She owned, in her own right, two properties, one a semi-detached house in Exning Road and another small flat in Weston Way, both were normally let.  At the time she decided to leave her husband the Weston way property was vacant and so she moved into it.

Bear in mind she has moved from a marital home into a property which the tribunal judge described as “a small bedsit-type flat”.

The evidence presented to the tribunal was partly through a personal appearance by Mrs Bradley who was represented by her accountants, a revenue officer called Mr Hall and a bundle of agreed documents.  It is not clear from the Tribunal report whether legal representations were made on behalf of Mrs Bradley but the lack of any reference to them suggests that the evidence presented may have related solely to Mrs Bradley’s condition at the time of the events.

She was suffering from depression which required medical treatment and as a result, it was claimed, did not change her mailing address although she did claim single person discount for council tax purposes.  Her 16 year-old daughter, who continued to live with the husband brought her post over to her.  She continued to have a joint account with her husband but also had two bank accounts of her own which she used on a daily basis, one being used for the property business, the other her own personal money.

Then the Exning Road property became vacant and she decided to move into it – not surprising given that she was living in a ‘bed-sit’ – but made her fundamental and fatal mistake.  Although she moved into the property in April 2008 a couple of weeks earlier, on 20 March 2008 she had instructed estate agents to sell Exning Road.  No offers were received at that time, she continued to live in the property, and, said the Tribunal Judge  “even though Mrs Bradley told us that she was resigned to living permanently at Exning Road”, she never took the property off the market.  She redecorated the property at this time to make it ‘more a home’ as having been tenanted it was in poor decorative condition.

During the autumn of 2008 she became reconciled with her husband and she moved back to live with him in November of 2008.

The Tribunal Judge adds, without further detail, that Exning Road was then sold in January 2009.

Now it strikes me that we have an extended period of residing (for that is surely what, on the scant evidence quoted by the Tribunal Judge we have) in both the Weston Way property (from August 2007 to April 2008) and the Exning Road property (from April 2008 to November 2008) when compared to the bare 5 weeks of residence that was held insufficient in the Curtis v Goodwin case.

However the Tribunal Judge decides that Mrs Bradley did not intend to reside at Exning Road with a sufficient degree of permanence because it remained on the market and was, eventually, sold.  In this he claims to be supported by the Metcalfe case where there is, to be frank, no evidence that Metcalfe really did reside in the property at all, given the very low utility bills.

Now let us consider again what the judge said in Curtis v Goodwin – there needs to be “some degree of permanence, some degree of continuity or some expectation of continuity”.

Now even if there is, on the facts as determined with the benefit of hindsight, no degree of permanence, the judgement in that case refers to “some degree” of permanence and, perhaps more significantly, “some degree of continuity”.  It seems from the evdence that having moved into the Exning Road property she did not stay elsewhere on occasion, she stayed continuously at that address, and on her own evidence which the Tribunal Judge evidently accepted, she was “resigned to live permanently at Exning Road” which would seem clearly to comply with the required “expectation of continuity”.

It would seem that the only factor that prevented the property qualifying was the mistake of having placed the property on the market and not having then instructed the estate agent to take the property off the market again when it seemed clear it would not sell, no offers having been received.  Had the property not been placed on the market at all would the Tribunal Judge have come to the same conclusion?

Does this mean that whenever a taxpayer places the house that they live in on the market on a speculative basis it ceases to be their residence?  Surely not.

It seems to me that Nicholas Alexsander, the Tribunal Judge, has erred in law in placing too great an emphasis on the word permanence and far too little on the word ‘degree’; in seeming to ignore the concept of continuity, although it seemed clearly to be present, and the expectation of some degree of continuity. He stated “it was always only ever going to be a temporary home, and therefore it was never her residence” – but surely a temporary home may still be a residence, particularly if the taxpayer has no other residence – where did Susan Bradley reside after she had separated from her husband?  A separation that lasted for more than a year and which the Tribunal Judge accepted as being itself likely to prove permanent.

The Tribunal Judge in the Favell case, Guy Brannan, pointed out that the facts in the Curtis v Goodwin case were extreme, that the 5 week occupation of the property was merely temporary, in the words of Lord Justice Millett – a ‘stop gap’.  That is hardly the case here.  Had Favell been able to show occupation of the property for the 11 month period he would, he said, “have been minded to accept that the occupation would have amounted to residence” even though Favell admitted, in evidence produced by the revenue, that he claimed to have moved out without any intention that it should be a permanent move, he moved out because of “difficulties at home”.

I do not know whether the taxpayer will wish to appeal to the Upper Tier, I hope she does as this seems to me to be the wrong decision.  Of course the Tribunal Judge’s summary does not indicate all that transpired or indeed all of the evidence that was presented, but if allowed to stand it moves the boundary of what may be considered to be or not to be accepted as  ‘residence’ a very long way from the ‘stop-gap’ referred to by Millett, and creates a degree of concern for any taxpayer who wishes to move, when appropriate, from property to property, to ascend the property ladder.

This podcast was presented, written and produced by Paul Soper who asserts copyright therein.  The full text of this podcast can be read at my site taxationpodcasts.com. For further details of podcast production, particularly if you would like me to create them for you, contact me at Paulsoper, all one word, at mac dot com.

Until next month, or maybe even sooner!…

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A19 – What about the vulnerable?

Not every taxpayer is professionally represented and I’d like us to spare a thought for one particular group of taxpayers who might be characterised as being vulnerable.

A proposal is being consulted on by HMRC at present which could massively disadvantage these vulnerable people under the guise of making an existing extra-statutory concession more ‘user-friendly’ – the reality is likely to be the opposite for the vulnerable.

The concession is the one known as A19 and it rose to particular prominence a couple of years ago when HMRC were first able to reconcile taxpayer records and discovered that many people, hundreds of thousands, had paid too little tax.

Newspapers led a campaign encouraging taxpayers to take advantage of this extra-statutory concession – whether they were entitled to benefit from it or not – and this is where the problem started.

A19 says, in a nutshell, that if HMRC have failed to make timely use of information provided to them, and they then try to recover tax more than a year later from taxpayers who have reason to believe that their tax affairs are in order – then there is a discretion under which the tax due is not collected.

Now in some ways the most significant part of that is the bit about belief that your affairs are in order – if you are professionally represented and you have paid too little tax you cannot really try to claim the benefit of this provision that’s why practitioners would rarely see it unless approached by a taxpayer with substantial tax demands.

However a vulnerable taxpayer is much more likely, because of their disadvantage, to have that belief and so be able to benefit from this provision – so who might we consider to be vulnerable?

One group, obviously, would be the elderly, another perhaps those who have been recently widowed where the deceased spouse may have had sole responsibility for dealing with financial matters.  Another would be those members of our society who suffer from learning disabilities of all kinds, or those suffering from a mental or physical incapacity, whether permanent or because of illness.

So what do HMRC propose and why is it a problem – and what should we, as tax professionals do about it?

They intend to remove the requirement for reasonable belief and replace it with a more objective test which recognises revenue and taxpayer responsibilities instead.

The responsibilities undertaken by HMRC are no more than what they already do, or should do, but taxpayers are expected to take an interest in and have certain responsibilities for their own taxation affairs – and it is here that the major disadvantage for the vulnerable is introduced as there is no discretion left for those who are not easily able to be involved in their own affairs.

At present the reasonable belief discretion can be applied subjectively based on the taxpayer’s personal circumstances but this cannot be done where there are objective responsibilities.

However the problems with the new proposed A19 don’t stop there.  The revenue propose time limits so that a taxpayer is expected to inform HMRC of the problem, following the issue of a P800 tax statement, within the same tax year, before the new coding is applied to collect the underpayment in the following year.

Now whilst convenient for the revenue administratively, the example they give is of a taxpayer who is issued with a statement in June and is expected to advise HMRC of the problem before the following April – seems reasonable – however as they themselves point out these documents are issued throughout the whole of the year and if one is issued in March a taxpayer may have only days to react.

Furthermore the vulnerable may not appreciate the document’s significance until the tax deduction commences in the following year, under the new rules this is too late and would deny that person the benefit of the concession.

Although the original A19 operated where at least a year’s delay in using information had occurred it also provided for exceptional circumstances and in one recent case concerning a Mr Clark the Tribunal judge observed that he had received 14 separate coding notices which were confusing and difficult to understand – even though he had been notified within the same year the Tribunal judge ruled that exceptional circumstances could be considered in isolation from the one year rule .

The new ESC A19 proposes to remove the provision concerning exceptional circumstances altogether and clearly vulnerable taxpayers will be hit by this as well.

It further proposes not to apply to CGT on the reasoning that this is operated through self assessment but it does not recognise that non self assessment taxpayers might attempt to advise HMRC of a gain, as happened in a case concerning an elderly married couple, the Henkes, some years ago.  They filled in repayment claim forms R40 and attempted on this form to notify the revenue – at that time the form R40 advised that if there was a gain to report the revenue would send a form R40(CG) – although this had ceased to exist with the introduction of self assessment.

The local district sent them a self assessment capital gains form SA108 as a standalone document which was not acceptable unless accompanied by a return.  The tribunal ruled with reluctance that no return had been made so that a discovery assessment could be raised.  But this would be a situation where revenue discretion could be applied – not any longer!

Practitioners may not feel that this is very relevant to them but in the interests of the vulnerable I think we should ALL of us take part in this consultation and make it clear to the revenue  how unacceptable it is not to make adequate provision for the vulnerable – because the vulnerable will not be able to make these representations themselves.

Mind you this isn’t the only mean-spirited announcement by the revenue recently – they have just announced the interest rates that may be applied to Save As You Earn Share Option Schemes – these used to be a very popular way of employees saving with a tax-free return that was in total better than a PEP or an ISA which could be used, if the employee chose, to take up share options which employers could issue at a discount of up to 20%.  It was risk-free because if the shares went down in value there was no obligation to take up the options simply benefit from the tax-free savings rate.

For some time now shorter term contracts – those for three years and five years  – offered a zero return but the seven year contract offered a bonus of 1.6 times a monthly payment, equivalent to an interest rate of 0.58% – from 1 August 2012 this becomes – ZERO as well.