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!…