John and Sarah spotted a bargain property one evening whilst out walking their dogs.
The very next morning John called the estate agent, arranged a viewing and put an offer in, there and then. To cut a long story short, they paid £250,000 cash for the house, and they promptly moved in.
Three months later, having done some refurbishment, they were on the move again after spotting another bargain. They sold the house for £375,000.
John and Sarah had always assumed that the sale of a dwelling house, which has been occupied as a main residence, is exempt from capital gains tax. However, they were not aware that a gain on a main residence, which was bought wholly or partly with the objective of realising a profit on the sale, is excluded from the exemption.
A few months later, John and Sarah received a brown envelope from Mr Reaper of H.M. Revenue & Custom, assessing them to income tax on the £125,000 profit from the sale!
John angrily wrote back stating “all house purchasers expect their property values will increase over time and there is an anticipation of a gain. Many individuals, and couples, of which they are one, know they will be selling in say, a few years’ time to buy larger properties....”.
So what’s the big issue?
The exclusion is clearly not aimed at normal home purchases and sales.
The fact that the house was purchased because it was a ‘bargain’ does not itself prevent the exemption from applying.
However, if the purchase and sale is within a relatively short period of time, the point could be raised that the principal reason for buying was to realise a quick profit. Similarly, Mr Reaper has assessed John and Sarah to income tax, because he is assuming the profits made are trading profits, and not capital gains.
Mr Reaper asked for the following to be demonstrated:
· That the intention was to occupy the property as their main residence.
· That the property was actually occupied as the main residence.
· The intention to sell the property had arisen, after the property was acquired.
· The timing of any advertisement of the property for sale or its placement with an estate
agent should be consistent with the above facts.
There have been several tax cases recently where taxpayers’ claims for main residence relief have failed. In one case, the courts referred to the low level of power consumption in the electricity bills in reaching its conclusion that there was insufficient occupation to qualify for the exemption.
The main residence exemption is a valuable one and care should be taken to establish beyond any reasonable doubt, if an early sale is found to be necessary, it can be properly related to the facts above.
Upon further investigation by Mr Reaper, it became clear that John and Sarah had found many bargains over the past 5 years. Mr Reaper opens up a number of discovery assessments into earlier tax years.....John and Sarah are on a very sticky wicket!
The dog’s names were Bill and Ben.