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Matthew Hutton MA, CTA (fellow), AIIT, TEP, presenter of Monthly Tax Review (MTR), highlights a practical point on the two year time limit for making a main residence election for capital gains tax purposes.

Matthew Hutton

Introduction

A change of circumstances (starting to pay rent by virtue of TLATA 1996) does not bring about a new residence, causing HMRC to have to choose between the residences (in the absence of a taxpayer election). There is therefore no opportunity to create a fresh election.

However, by contrast, if trustees were to dispose of the property to the taxpayer, this would trigger a CGT charge which, following Griffin v Craig-Harvey [1994] STC 54, would enable the taxpayer to make a fresh election.

Triggering the two year period for electing

In Griffin, the following examples of events giving rise to a fresh election period were discussed:

(a) A taxpayer owns two houses, each of which he occupies as a residence. More than two years have elapsed since he began to have two residences. He then begins to use a third house as a residence. A new two-year period begins to run at that time so that he can make an election as between all three residences during that two year period.

(b) If on the same facts the taxpayer ceased, after acquiring a third residence, to use one of them as a residence, a new period will begin at the time of cesser so that, again, he will have a period of two years during which he can elect between the remaining residences.

(c) The taxpayer owns two houses which he occupies as residences. The taxpayer conveys one of the houses to the trustees of a settlement under which he has a beneficial interest and the trustees have power which they exercise to permit him to continue to reside in the residence. A new two year period begins at the time when he creates the settlement and again an election can be made (jointly by the taxpayer and the trustees) within the subsequent two years.

(d) The taxpayer has two residences, one owned by him and the other by the trustees of a settlement under which the trustees have power to permit the taxpayer to occupy it as a residence. No election is made during the two years following the inception of this state of affairs. If the trustees have and exercise a power to transfer the residence which they own to the taxpayer he can elect that that residence is to be his main residence at any time during the subsequent two years.

In relation to examples (c) and (d), Vinelott J said: ‘The last two examples seem to be altogether unsurprising consequences of the legislation. If the taxpayer settles a house which he owns and uses as a residence or if trustees exercise a power to transfer to him a house which he previously occupied as a residence, the transfer of the house to the trustees or from the trustees to the taxpayer is a disposal giving rise to a charge to capital gains tax on any gain so far as not exempt under s 101 [now TCGA 1992 s 223]. The position is the same as if he had bought the house from or sold it to a stranger.’ This produces the strange result that the trigger for making a fresh election is not the beginning or the ceasing to occupy a property as a residence, but rather the fact that a charge to CGT has been triggered on the disposal of the properties.

(Contribution by Katherine Fidler, Mishcon de Reya)

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