Main residence: no relief when acquired for a gain

CGT, Property l

In Paul Gibson v HMRC [2013] TC03021 a taxpayer was denied capital gains tax (CGT) private residence relief when he totally rebuilt and then sold his house. The First Tier Tax Tribunal (FTT) found that he had acquired it wholly or partly for the purpose of realising a gain on disposal.

Mr Gibson brought a house, with the financial assistance of a friend.

– He lived in the house as his only home before applying for planning permission. He then demolished the house and rebuilt a substantially larger house.
– He stayed in the house for four months finishing off works and then sold the house at a gain.
– He claimed that the original plan was that his girlfriend would sell her house and then her parents would make a gift of cash and that would enable him to repay his friend and they could live together in the new house. However that did not happen.
– He also paid his friend a fee when the house was sold, and also appeared to have other arrangements with his friend whereby he held two other houses on trust for the friend.

HMRC denied CGT relief on the basis that the house had been acquired wholly or partly for the purpose of realising a gain. It also assessed sizable penalties for negligence.

The FTT (composed of a Judge and a lay member) were split in making a decision, so the Judge’s view held. Clearly the judge was troubled by the evidence: the taxpayer’s unusual set up with his friend and the fact that he paid him a fee after the disposal. However the taxpayer failed to persuade the Tribunal that his occupation of the new house was any more than just “camping” at the end of the build and so there was no quality of occupation to make the new dwelling a residence for s233. On the facts it decided that the house was acquired wholly or mainly for the purposes of realising a gain.

The taxpayer did not try to calculate his gain. So the Tribunal accepted HMRC’s computation.

The penalty

Mr Gibson’s main argument was that he genuinely did not consider that he was required to return the capital gain in the circumstances. The Tribunal was not persuaded that ignorance of his obligations as a taxpayer is of itself a reason for reducing the penalty. It was not persuade that he had established any grounds for reducing the penalty imposed.