It is often assumed that when a person owns only one house and does not let it out to others, then, provided that the house was not purchased for a trading purpose, any gain on the house is free from tax by virtue of ‘principal private residence relief’.

However, a recent case has shown the limits of the relief and should be borne in mind by anyone who owns a house that is not, for whatever reason, their main residence as a matter of fact.

The circumstances were that a young man, who had recently been divorced, was in the process of buying and renovating a property when his sister became seriously ill. He completed the purchase of the property in May 2003 and moved his belongings into it. However, because of her poor health, he went to stay with his sister, who died later that month. After her death, he continued to spend most of his time at her former home (2 College Gardens) and eventually put his own house on the market. It was sold in January 2004.

HM Revenue and Customs (HMRC) sought to tax the profit he made on the house as a trading transaction. That claim was rejected. However, HMRC’s alternative contention, that the transaction led to a chargeable gain for Capital Gains Tax (CGT) purposes, was accepted.

The man’s claim that it was exempt from CGT by virtue of being his principal private residence was rejected. The Tribunal Judge said, “We find that after the death of his sister the Appellant’s stay at the Property lacked the degree of permanence for it to qualify as his principal private residence as by his own admission he spent most of his time at 2 College Gardens. As a result of this we find that the Property was not his only or main residence as was necessary for its subsequent sale to […] attract principal private residence relief.”

Had the man lived in the property for a reasonable period before selling it, the exemption could have been validly claimed.