Cast your mind back when Members of Parliament were accused of ‘flipping’ properties to avoid Capital Gains Tax (CGT) on the sale of a second property?
Theoretically, it should be possible to buy a second home, live in it for a short period, and as long as certain procedures are followed, have the last three years of ownership ignored for CGT purposes. By implication, if you buy and sell the property within a three year period you will pay no tax on the sale. This process is described in some circles as ‘flipping’.
Recent court cases seem to be challenging this type of arrangement and making it more difficult for property owners to avail themselves of the Principal Private Residence Relief (PPR). The decisions may also have an effect where there is only one home which is occupied on a temporary basis.
In a nutshell the Courts are using the issue of ‘permanence’ to deny relief.
Mr Moore v HM Revenue & Customs (HMRC)
In this case Mr Moore decided he wanted to live apart from his wife of many years and he moved into a house that he had previously rented out. He lived in this house from November 2006 to July 2007. Although he was careful to have his Council Tax bills sent to his new house, all of his other bills were forwarded to his new partner, who he subsequently married.
The Court decided that Mr Moore had never intended that his residence in the second home be more than a temporary arrangement, and that his true intention was to purchase a larger property with his future wife that would accommodate her children.
The arrangement lacked permanence.
Dr Eghbal-Omidi v HM Revenue & Customs (HMRC)
In this case a doctor agreed to purchase a house in December 2006 and the sale was completed in March 2007. In May 2007 the doctor sold the house making a large profit.
Again the doctor contended that he had occupied the house and therefore no tax should be payable.
The Court disagreed. His occupation lacked any permanence and relief was denied.
Decided cases on this issue now conflict as earlier judgements did not place such significance on the matter of permanence. Until the Courts provide a definitive ruling, or HMRC provide some clear guidelines, an appropriate approach to tax planning is a difficult call.