In David Morgan v HMRC  TC 02596 a taxpayer was successful in a claim for Private Residence relief (PRR) for Capital Gains Tax (CGT). He lived at his property for a matter of weeks before deciding to let it out because his girlfriend had left him.
- Mr Morgan made arrangements to buy a flat in the early part of 2001 when he was engaged to be married to Miss Varley.
- A mortgage was arranged in Mr Morgan's name but with a note on the Deeds under heading "Special Conditions – Non-Borrowing Occupiers" stating: "We believe that the persons(s) named below may live at the property..... Miss Paula Emma Lucy Varley".
- Mr Morgan signed the exchange documents in relation to the property but shortly before completion on or about 1 June 2001 Miss Varley ended the engagement.
- Mr Morgan completed the purchase on 15 June 2001 and moved into the property.
- Having decided that there was no hope of reconciliation with his ex-partner, the property was let from 31 August 2001 to 15 March 2006 when Mr Morgan moved back in with a view to selling it, and it was sold on 28 July 2006 for £188,000 he then claimed Private Residence Relief for capital gains tax.
- HMRC assessed him for CGT asserting that no relief was due.
The grounds of appeal were stated to be:
"The correct decision would be to remove the tax levied at me for capital gains as I have met the criteria to receive Principal Private Residence relief".
Evidence was conflicting: Mr Morgan in one letter to HMRC said that Miss Varley had moved in with him, and in another he denied it. It was found that he moved in with little furniture and he did not even need to hire a van, but the flat had fitted furniture and his parents bought him some white goods. He did not have any large bills at the property for light and heat but it was summer. He did not inform his bank of his change of address, but the mortgage documents were sent there. He did not change his mortgage to (a more costly) buy-to-let mortgage until several years after letting it. He moved back in, but only shortly before selling the property.
The tribunal found it "finely balanced" but Miss Varley's name was on the mortgage deed as a future occupant and this gave the tribunal unrefutable evidence of intent. It found that the witness was credible and they decided that his intention had been to make the flat his residence with his girlfriend and although his actual occupation of the flat was just for a short time it was nevertheless occupied as his main residence.
Aside from the error in the grounds for appeal (there is no "Principal" in "Private Residence relief"). This case was extremely "finely balanced" according to the judge. There were no surprises that HMRC raised an assessment, however as often happens the result turned upon the evidence of the taxpayer. It can be extremely difficult to prove anyone's intention before they move into a property, especially when the events were run out some ten years previously. The judge noted that HMRC placed too much reliance on "quality of occupation" and had not got the facts correct in the leading "quality of occupation" case (Godwin). We have seen some other variations on this theme (where girlfriends etc. don't move into the flat for whatever reason) where taxpayers were less successful.
Useful guides on this topic
PRR: Private Residence Relief
What is Private Residence relief (PRR)? What are the qualifying conditions? Can you claim relief on two homes? How do you claim PRR? Can you claim PRR if you develop your garden?