A property owner has lost a £43,000 dispute with HMRC over his claim for principal private residence (PPR) relief – a valuable capital gains tax break.

The First-tier Tax Tribunal (FTT) ruled the taxpayer, Sabbir Patwary, had failed to prove he lived in the property he claimed was his main home.

Here, we take a look at the case and share our advice for taxpayers and tax agents…

Background to the Sabbir Patwary v HMRC tax appeal

Mr Patwary lived at home with his parents in a property on Aldborough Road in London until 9 April 2010 when he bought 19 Emmott Close in London.

He claimed he lived at the Emmott Close property from April 2010 to October 2013, together with his then girlfriend and a tenant who shared the whole property with them. (Mr Patwary married his girlfriend in 2012 and the couple have since divorced.)

From October 2013 a tenant occupied the property, as Mr Patwary had moved back to live with his parents. It was sold on 26 February 2016.

The PPR relief dispute

The appeal centres on a closure notice issued by HMRC that rejected Mr Patwary’s principal private residence relief claim for the year ended 5 April 2016, after the sale of 19 Emmott Close. Mr Patwary claimed for both PPR and lettings relief on the sale.

HMRC didn’t contest the lettings relief claim, so the sole issue was whether PPR should apply. For this relief to be allowed, the property must have been the only or main residence of the taxpayer.

The amount of tax at stake was almost £43,200 on a capital gain of more than £202,000.

And the onus was on Mr Patwary to show he’d lived at the property.

What is principal private residence relief?

In general terms, when you sell a property, you’re liable for capital gains tax (CGT) at a rate of up to 28 per cent unless it was your primary residence, in which case you could be exempt from CGT. (However, there are several caveats to this, which a tax adviser can advise you on.)

The appeal hearing

The Sabbir Patwary v HMRC case was decided by the First-tier Tax Tribunal (FTT), which heard:

  • The flat was a maisonette in a block. There were rooms on the ground floor and two bedrooms upstairs.
  • Initially Mr Patwary lived at the flat with his girlfriend. Their friend moved into the property in around 2011 because his girlfriend needed some (unspecified) help.
  • He was working in Bethnal Green at the time and could walk to work. He worked with his father and so he saw no need to change address for anything because his father could bring any post daily. Plus, he received most information (including from his banks) online.
  • He didn’t register to vote at his new address because he preferred to vote in the more marginal constituency of his parents’ home where his vote would carry more weight.
  • Mr Patwary didn’t have council tax statements for the property. He said in a letter to HMRC that his housemate was responsible for this. But there appears to have been a period where there was no-one else at the property apart from him and his girlfriend.

The tribunal decision

The tribunal judge, Sarah Allatt, agreed with Mr Patwary the tribunal shouldn’t be prescriptive about what evidence shows residence. She said that where bank statements were sent – particularly where information is more readily accessed online – wasn’t determinative of residence.

But she added: “The evidence that was produced is all of the kind that might be properly addressed to an owner, even if someone else was living in the property at the time. We have seen nothing other than assertions by the Appellant that back up his claim to have lived at the property.”

The tribunal ruled Mr Patwary hadn’t proved HMRC’s assessment was incorrect, and therefore rejected the appeal.

Our advice for taxpayers about PPR relief

Principle private residence relief is a valuable tax relief, so it’s no surprise when HMRC challenges claims where the facts might be unusual.

It’s a misunderstood area and you might be under the impression that simply buying a property and staying there occasionally is sufficient to claim the relief.

But the reality is that because the tax loss to the Treasury is likely to be significant on property sales where PPR is given incorrectly, there are many complexities built into the legislation.

And the onus is on you to show your disposal places you in the rules in the first place.

What accountants need to be aware of

PPR might appear to be a simple concept: any gain on a taxpayer’s main residence is exempt from CGT. But in reality it has many intricacies, so it’s possible for taxpayers to inadvertently make a mistake.

The relief is automatic, and no entry needs to be included on a self-assessment tax return. However, it’s important for your clients to understand the limitations, such as the amount of land that attaches to the property. Plus, they might be asked to give evidence that the dwelling was actually used as their private residence.

So, while it’s easy to claim PPR, it may be harder to prove it’s due when scrutinised by HMRC.

PPR tax advice

For expert advice on principle private residence relief and other tax issues, contact our team on 07813 434195 or email stephanie.churchill@churchilltaxation.co.uk We can also help with HMRC tax enquiries and investigations, and we offer a tax expert witness service.

Steph Churchill

Stephanie Churchill

Managing director & co-owner of Churchill Taxation