Home is where the dog is

Disposals of residential property bring the potential for any gain to trigger a capital gains tax (CGT) liability. If you dispose of your main home, principal private residence relief (PRR) usually renders the gain exempt.

But as always with tax, there are conditions. The most straightforward scenario is where you have only one home, and live in it, as your main home, for all the time you own it. Life, on the other hand, isn't always that simple.

Where a property is acquired with a view to profit, PRR can be denied, and HMRC is increasingly alert to such possibility. Two recent tax cases illustrate areas of potential challenge.

In one, the bone of contention was whether 'period of ownership' runs from date of contract (HMRC's view) or date of completion. The property was a flat, purchased off-plan, and the issue of dates significant because the credit crunch delayed construction for some three years - while property prices rose. At contract date, the flat was unbuilt, and the 'residence' just an empty 'space in a tower'. When the taxpayer sold, HMRC time apportioned PRR, and with CGT of over £60,000 at stake, the case went all the way to the Court of Appeal. Here it was held that HMRC's interpretation ran 'counter to the ordinary meaning of the words "period of ownership"': a victory for common sense and good news for taxpayers.

Taxpayer, Carol Adams, was not as fortunate. Contending that a two-bed London house, previously let out, was her main home for six months before it sold, she claimed what is called 'final period exemption' for PRR, bringing a longer period (currently nine months) outside the scope of CGT. HMRC argued she had never occupied the house as a residence at all, and if she had, it was not her main residence. Complicating matters, Ms Adams also owned, and had lived in, a 'substantial property' in the country. HMRC held there was insufficient 'degree of permanence, continuity or expectation of continuity … to amount to residence' of the London house. It clearly suspected a decision to sell had been made early on, scouring the estate agency's online photographs for signs of genuine occupation.

And this was where the dogs came in. Ms Adams owned two Labradors. Noting the 'complete absence of … canine paraphernalia' in the photographs on Zoopla, Tribunal commented that it would 'be unusual for a pet owner to move to a new house on a permanent basis' leaving the pets behind. HMRC's view of impermanence won the day, losing the taxpayer over £40,000 in CGT. So it's official. Be careful where you put the kennel: home is (very possibly) where the dog is.

PRR claims can be lost without attention to detail. We should be delighted to help you review the availability of this important relief in your own circumstances.