CGT Private Residence Relief: intention, intention, intention says First-tier Tribunal

CGT Private Residence Relief: intention, intention, intention says First-tier Tribunal

Mon 20 Nov 2017

HMRC have failed on all counts to impose CGT on the disposal of a house bought for use as the taxpayer’s principal private residence (PPR) in Bailey v HMRC ([2017] UKFTT 658 (TC)). The disposal of the house had been omitted from Mr. Bailey’s return and HMRC had also sought penalties for deliberate omission.
There were a number of issues at stake before the First-tier Tribunal (FTT) involving HMRC procedural errors as well as the question whether PPR relief was available. The disposal took place in 2010/11 but when Bailey submitted that year’s return, on time, he did not include the disposal of the property.
HMRC first issued a letter purporting to open an enquiry into the return and tried to issue an amendment to Bailey’s self-assessment but withdrew that amendment when they realised that the enquiry window of 12 months from the date of submission of the return had already closed. HMRC could not then amend Bailey’s return but if they discovered a deficiency in the assessment the options open to them would be: to
• within four years after the end of the tax year, raise a “discovery” assessment for underpaid tax that they could not reasonably have been aware of based on the return filed;
• within six years after the end of the tax year, raise a determination of tax underpaid due to Bailey’s carelessness; or
• within twenty years after the end of the tax year, raise a determination of tax deliberately underpaid.
HMRC issued an assessment for 2010/11 on 23 April 2015, i.e. more than four years after the end of the year it related to. This assessment could only be valid if HMRC could show carelessness or deliberate failure on Bailey’s part. HMRC stated that they considered the omission from the return to be deliberate but gave no reason why.

The PPR question

Bailey appealed on the basis that there was no understatement of tax because he had occupied the house as his PPR immediately on acquiring it and it had then been sold within three years of that first occupation, so that PPR relief applied to the whole of the period of ownership. At the time in question PPR relief applied automatically to the last three years’ ownership of a property that had previously been occupied as PPR: this has since been reduced to only the last 18 months’ ownership.
The first question considered by the FTT was whether there was a chargeable capital gain at all. Bailey had occupied the house for a short time before moving out and letting it but his evidence was that he had bought it with the intention of making it his permanent residence but had to change plans when he could not obtain any mortgage other than a buy-to-let mortgage under the terms of which he could not occupy the house. He rented the house out until the tenant died and then moved back in but business and personal health issues made it impossible for him to remain in the house, which he then sold. HMRC accepted that if it was Bailey’s intention to occupy the house as his main residence then it must be eligible for PPR relief and, although they disagreed with his assertion that that was his intention his evidence before the FTT went largely unchallenged. As a result the FTT ruled that because PPR relief applied, there was no CGT liability that had been omitted from the return and as a result there could be no penalty either since a penalty could only be sustained if tax was unpaid.

Validity of assessments

As well as considering the PPR issue the FTT decided that even if there had been an underpayment of tax, the assessments made by HMRC could not have stood as valid because HMRC had failed to back up their assertion that the failure to include the disposal of the house amounted to deliberate behaviour. When an assessment is raised the burden of proof that they are valid falls on HMRC; i.e. HMRC had to establish a case supporting their contention that Bailey’s omission was deliberate, as alleged, or that he had been careless, if they were to claim that.
Since HMRC’s case rested on an unsupported assertion of deliberate conduct they had fallen at the first hurdle and the assessments could not be valid.


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