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HMRC’s New Crackdown on Abuse of Private Residence Exemption

HMRC’s New Crackdown on Abuse of Private Residence Exemption
Have you used the Principal Private Residence (PPR) exemption on several properties in quick succession recently? HMRC’s crackdown on the perceived abuse of the PPR exemption could mean a knock at the door...

 

Should any Chancellor decide to abolish the Principal Private Residence (PPR) exemption he will save the Exchequer approximately £120 million per annum. Such actions may be difficult to implement despite being on the recently issued list of Tax Reliefs for review by the Office of Tax Simplification.

 

Even so, the Government needs all the money it can get and to this end the Chancellor has instructed the Local Compliance Investigation Teams of HM Revenue and Customs’ (HMRC) to take a tough line with those owners of second homes and ‘buy-to-let’ properties who try to follow the MPs example and abuse the legitimate tax planning method of ‘flipping’' property that they maintain is their PPR.

 

As the article ‘Flipping Marvellous’ (October 2010 edition) pointed out ‘flipping’ is a perfectly legitimate tax planning exercise. However, if used too many times or in quick succession, there is the danger that HMRC will initiate an investigation in an attempt to prove that either the PPR exemption is invalid and that the real reason for nominating the properties is avoidance of tax, or the owner is really a ‘serial seller’ such that any profit on sale is to be taxed under income tax rather than CGT rules.


Designated Compliance Unit


It costs HMRC to launch an investigation, so they have to concentrate their efforts where they are most likely to see maximum return in terms of fines and penalties. Random cases chosen for investigation are therefore small; the vast majority are selected.


To assist in their task, HMRC has invested in a new computer system based at the IT department of the Valuation Office Agency in Worthing, West Sussex.  Its primary responsibility is stated as being ‘the specifying and testing both new and improvements to applications software for our three main business streams; Rating, Council Tax and property valuation for the Inland Revenue, other government departments and local authorities’ (Valuation Office Agency website).


This system brings together information formerly based in District Councils and enables the comparison of data collected such that for example, an HMRC inspector can request a search to provide an historical list of all properties purchased by a landlord, or in some cases members of the landlord’s family.


This list can then be compared with declarations made on the CGT pages of personal tax returns. Properties sold within short timescales are therefore easily identifiable and tax return declarations easily checked. HMRC have had such success with their new system that they have formed a designated compliance unit tasked with targeting ‘tax evading’ property developers and ‘buy to let’ landlords.


Gathering Information from Other Sources


The new computer system is not the only database used. HMRC also compile lists using information gleaned from other sources, for example banks and building societies are required to provide details of accounts on which interest is paid over a certain amount.  Such details may confirm the opening of a new bank account in which a large amount has been deposited. If this ties up with an entry on the Land Registry following the sale of a property, this could possibly mean that a chargeable gain should have been declared on the tax return.


Internet Reveals All!


In the current climate, HMRC knows exactly how many owners are trying to sell which investment properties to curtail their losses. Their primary source of information used to be local newspapers but this is being increasingly replaced by the internet which produces quality information, not only of houses for sale or to rent but also of planning applications in relation to proposed house conversions which are then sold at a later date producing a potential CGT liability.


The use of the website ‘Rightmove’ not only gives the sale/rent information but, most importantly, produces an estimate of the capital appreciation of a house since the last transaction. A check with the credit agency ‘Experian’ (again possible online) will show details of loans and mortgages of the taxpayer and people he is connected with as well as identifying any linked addresses.


HMRC may also search the ‘Northgate Public Services Information System’ database which contains details of housing benefits paid to landlords by any UK local council. Councils are duty bound to place this information on the database and of course this is readily available to HMRC.


Moore v HMRC 2010


This case showed that at the start of an investigation the first check made by the HMRC is of Land Registry documents; the next step is to identify the landlord and ascertain whether or not he or she is filing tax returns and declaring the lettings income. If the landlord is registered for self assessment but is not declaring the income then the intelligence gathering process starts in earnest.


An investigation may start by looking at another area of the tax return and lead to a potential CGT liability being discovered. For example, in what has become a popular source of income for some, SW19 residents let out their homes to players and officials in Wimbledon fortnight. Every year teams from HMRC attend the area, even knocking door-to-door, to ascertain whether homes have been rented out or are being used as unofficial boarding houses.


As well as checking to see that the rental income is declared on the self assessment tax return, the information so gleaned is kept on file until such time as the Land Registry or ‘Rightmove’ show that the house had been sold - the PPR claim may then have to be restricted.

 

Remember!


To claim PPR, HMRC is not necessarily interested in how long the property has been owned or how long the property has been lived in as the PPR. HMRC views ‘residence’ on the basis of quality rather than length of occupation, meaning that ‘even occasional and short residence can make a residence; but the question is one of fact and degree’ (see HMRC’s Capital Gains Tax Manual at CG64441).

 

However, in practice, the longer the better seems to be the rule. To allow a PPR claim HMRC want proof that you have actually lived in the property - that the property genuinely was your PPR. They are looking for ‘permanence, ...a degree of continuity and expectation of continuity to turn mere occupation into residence’ (Goodwin v Curtis 1988 STC 475).


Other Court cases give a good indication as to what an investigating officer is looking for and what is needed to help prove that the property should be designated the PPR.

 

Practical Tip


It is a matter of fact whether a property is the PPR or not but to demonstrate the fact here are some suggestions:


• Utility bills should be in your own name at the property address.


•  Other documentary evidence (e.g. receipts for home insurance, telephone bills, DVLA records or credit reference agency records) should be kept showing that the address was used as the main residence during the PPR period. Information considered in evidence in the past has included fuel bills which suggested that a property was unoccupied for part of a winter when the taxpayer claimed it was being used as his PPR.


• The property address should be the voting address on the electoral register.


• Further points could include being able to demonstrate the purchase of furniture and furnishings for the property. Therefore keep receipts including delivery confirmation to help prove that bulky furniture was delivered to the property address under your name.


• Having bank statements delivered to the property address was one factor pre-internet but now at least the bank should have the address registered.


• Check the mortgage plan. The plan should revert back to a standard plan and away from a ‘buy to let’ mortgage.

 

As a final suggestion (which may be going a bit far!) it might be an idea to introduce yourself to the neighbours to let people know that you live there.


By Jennifer Adams