Helpsheets ... continued 35 from homepage

The capital gains tax only or main residence exemption and the required ‘quality of occupation’.

The exemption from capital gains tax (CGT) for a dwelling that is the taxpayer’s ‘only or main residence’ is an important one for homeowners. The value of the exemption means that some may be tempted to claim it on properties that may not clearly fall within its parameters. We must therefore look at what is meant by an only or main residence.

In its online guidance headed ‘Work out tax relief when you sell your home’, under ‘What counts as your home?’ HMRC states: “You must have lived in your home as your only or main residence at some point while you owned it…”

Quality of occupation

As intimated by HMRC, the important factor to remember is that the exemption applies on the disposal of a dwelling-house or part of a dwellinghouse which is, or has at any time in their period of ownership been, the owner’s only or main residence.

Having a dwelling designated as the only or main residence throughout the period of ownership means that the gain accruing during that period of occupation will normally be exempt from CGT. It will also mean that certain periods (e.g., the last nine months) will be exempt even if the property is not then occupied.

Various court cases have determined that whether a property has been a residence depends on the quality of occupation. For example, in Moore v Thompson (1986) 61 TC 15 it was noted that “even occasional and short residence in a place can make that a residence; but the question [is] one of fact and degree”.

Court and tribunal cases

Someone who has been living in a property for only a short period before selling it may gain an insight from the following legal decisions:

 • Goodwin v Curtis (1998) 70 TC 478: The taxpayer lived in a farmhouse for 32 days and the court held this was only a temporary occupation, so the house was not his residence.

 • Harte v HMRC (TC01951): The short periods that the owner lived in a house did not qualify for main residence relief.

 • Moore v HMRC (TC02827): The court held that a house was not a long-term dwelling because it was occupied for only a few months between the owner separating from his wife and buying another house.

 • Iles v HMRC (TC03565): A flat occupied for only 25 days did not qualify.

The owners did not qualify for relief in the above cases, but in Dutton Forshaw v HMRC (TC04644), although a flat was occupied for only seven weeks, there was evidence that it would have been occupied for longer had he not had to live elsewhere, so relief was granted. The gain was also exempt in Bailey v HMRC (TC06085), where the owner had intended the property to be his main residence but had to move out after a short period because he could not get a mortgage and for health reasons.

More than just intention

We can see from these cases that, generally, for a property to be an only or main residence, there should be a degree of permanence or expectation of continuity. Mere intention to occupy a house for a longer period is unlikely to be sufficient without good evidence of other factors preventing this.

Further, the dwelling should be occupied as a residence. This will mean more than, say, simply sleeping at the property. The occupant should be able to cook and eat, bathe and spend leisure time there. If it is felt that a property’s status as a main residence might be questioned, evidence of this (e.g., bills and photographs of the property in use) may prove conclusive.

Practical tip

In its guidance, HMRC also states: “You don’t get tax relief if you bought it just to make a gain.” This is based on a less well-known part of the legislation (TCGA 1992, s 224(3)).

How will planning can help to reduce inheritance tax liabilities.

In April 2023, the National Will Register reported that 42% of adults in the UK had not made any provisions for their estate distribution in the event of death.

This leads to individuals having no control over how the estate is eventually distributed and increases the likelihood of a high inheritance tax (IHT) charge suffered by the beneficiaries.

To ensure that inheritance left behind is maximised with a minimum tax charge, a number of planning measures can be considered when a will is drawn up, including those outlined below.

Exempt beneficiaries

The primary advantage of a will is that the deceased’s estate is distributed according to the wishes of the individual. A popular measure is to leave the entire estate to the spouse or civil partner, as this could lead to the entire inheritance being exempt.

Charity organisations are generally also exempt beneficiaries. Not only is the asset donated to a charity treated as an exempt transfer on death, but if the transfer is more than equal to 10% of the estate’s baseline amount, the IHT charge goes down to 36% (from 40%).

The baseline amount is the estate’s value after adjusting for any exemptions and the nil-rate band (NRB) but before the charitable donation and residence nil-rate band (RNRB) are dealt with.

Exempt transfers

If the individual has children who are minors, they can set up a bare trust in their will. This results in the assets transferred to the trust being managed by the trustees until such time as the beneficiary comes of legal age, whereupon the rights to all the capital and any income from the asset pass to the beneficiary.

Not only is this an effective way of protecting the interests of the dependents, but transfers to a trust result in the asset being excluded from the death estate calculation, leading to a reduced IHT charge.

Life policies

Another option is setting up a life insurance policy in trust. This will exclude the policy payout from the death estate calculation, but the payout can still be made to the beneficiaries specified in the instructions to the trustees.

Any risk of lifetime IHT on the premiums paid can be reduced or avoided by using the annual exemption of £3,000, or by ensuring that the premiums satisfy the conditions to fall within the ‘normal expenditure out of income’ exemption (see IHTA 1984, 21(2)).

Reduction in tax charge

In the context of families, an effective double IHT charge can be avoided if the individual ‘skips’ a generation when specifying the beneficiaries in the will. Assets left to the children will lead to an initial tax charge that will repeat when these assets are then transferred to the next generation.

The family as a whole can potentially save tax if the initial inheritance is bequeathed directly to the grandchildren, leading to a single tax charge on the assets transferred.

Naming direct descendants (children or grandchildren) as the beneficiaries of the residence possessed by the individual will lead to the deduction of £175,000 RNRB in the taxable estate calculation. This will lead to a direct tax reduction of £70,000 (i.e., £175,000 x 40%) and may be doubled if the unused RNRB of a deceased spouse or civil partner is available.

Investing in unquoted or quoted shares and securities of trading companies controlled by the individual can lead business property relief, provided assets have been owned for at least two years. Depending upon the type of investment, the relief can reduce the value of the investments by 50% or 100%, thereby possibly eliminating or reducing the tax charge.

As long as the individual is of sound mind and not under any undue pressure, the document written, signed, dated and witnessed by two independent witnesses will be legally valid.

Practical tip

A will can easily be replaced by a new one; or a codicil could be drawn up to amend the current one.

A look at the workings of the self-billing system and how it can be helpful for businesses.

Usually, it’s the supplier who issues a VAT invoice; but in some circumstances, the customer prepares the invoice instead and gives the supplier a copy. This system is called ‘self-billing’. Any business can use this procedure, so long as certain conditions are met.

Self-billing is an agreement between businesses, which is most commonly found in the building and haulage industries where large businesses often have many smaller sub-contractors.

How do I start using self-billing?

There is no requirement to obtain HMRC’s prior approval before starting to operate self-billing. Any business can use self-billing provided the arrangements meet the legal conditions laid down in SI 1995/2518, reg 13(3) and in VAT Notice 700/62 (September 2014): Self Billing.

HMRC recommend that a self-billing agreement should be reviewed every 12 months. At the end of that period, the business will need to review the agreement so that it can provide HMRC with evidence to show that its supplier has agreed to accept the invoices raised on its behalf and remains VAT-registered.

However, if there is a business contract with the supplier that includes the self-billing agreement in its terms, it may not need to make a separate selfbilling agreement. In these circumstances, the selfbilling agreement would last until the end date of the contract, and it would not need to review the selfbilling agreement until the contract had expired.

Why use self-billing?

The advantages of self-billing are:

• accounting staff will be working with uniform purchase documentation; and
• it may make invoicing easier if the customer (rather than the supplier) determines the value of purchases after the goods have been delivered or the services supplied.

Before a business begins self-billing, it should consider the following points:

• It can only recover the VAT shown on selfbilled invoices if it meets the conditions explained in Notice 700/62.
• It may find it difficult to set up self billing arrangements with its suppliers, or burdensome to maintain them.
• It will be responsible for ensuring that the self-billed invoices it raises carry the correct VAT liability for the goods or services supplied to it.
• If it is raising electronic self-billed invoices to large numbers of suppliers, it will need to ensure that its accounting system is robust and accurate enough to handle the demands that will be placed on it.

How does it work?

If a business self-bills, it must:

• raise self-billed invoices for all transactions with the supplier named on the document for a period of up to 12 months or if it has a contract with its supplier, for the duration of that contract;
• complete self-billed documents showing the supplier’s name, address and VAT registration number, together with all the other details that make up a full VAT invoice;
• set up a new agreement if its supplier transfers its business as a going concern;
• keep the names, addresses and VAT registration numbers of the suppliers who have agreed to be self-billed, and be able to produce them for inspection by HMRC if required. HMRC recommends that a business reviews these details regularly so that it can be sure that it is only claiming VAT on invoices it has issued to suppliers who have valid VAT registration numbers.

A business must not issue self-billed VAT invoices:

• on behalf of suppliers who are not registered for VAT or who have deregistered; or
• to a supplier which changes its VAT registration number, until a new self-billing agreement is drawn up.

Practical tip

Self-billing can make administration easier and reduce disputes with suppliers over the value of supplies received.