Introduction
Principal residence relief (PRR) is a part of Capital Gains Tax (CGT) rules in the United Kingdom. This relief removes taxes on gains from selling a home used as the taxpayer’s main dwelling. Lewis v Lady Rook [1992] STC 171, an important case in the Court of Appeal, defined how "residence" is understood for time before and after occupying a property. The case set out rules about how long and for what reasons such periods qualify for PRR, affecting later CGT decisions. This ruling helps identify which factors matter when using PRR.
The Facts of Lewis v Lady Rook
Lady Rook bought a property in 1982 to live in as her main dwelling. Significant repairs were needed before she could occupy it. These repairs took months, delaying her move. When she sold the property, tax authorities challenged her PRR claim for the time before she moved in. This led to legal action in the High Court and Court of Appeal.
The High Court Decision
The High Court initially sided with the tax authorities, stating physical occupation was required for PRR. The court limited "residence" to mean actual presence. This raised questions about delays such as repairs before moving in.
The Court of Appeal's Reversal
The Court of Appeal overturned the High Court’s decision. Lord Justice Nourse ruled physical occupation is not always necessary for PRR. The court expanded "residence" to include time before and after occupation if directly connected to using the property as a main dwelling. This broadened PRR’s application.
The "Purpose Test"
The Court of Appeal established the "purpose test" from this case. This test reviews the taxpayer’s intentions and actions related to the property. If delays before or after occupation are clearly for making or keeping the property as a main dwelling, PRR applies. For Lady Rook, repairs before moving in were seen as essential to make the home usable, so that period met PRR conditions.
Applying the "Purpose Test": Examples and Limits
The "purpose test" helps assess different situations. For example, if someone buys a home and takes time renovating it before moving in, that period may qualify for PRR. Likewise, time spent selling the home after moving out might count.
However, there are limits. Renting the property during claimed pre- or post-occupation periods lowers PRR claims, as it shows a different use. Long delays without clear reasons tied to home use can also disqualify PRR.
Effect of Lewis v Lady Rook on Later Cases
Lewis v Lady Rook shaped many later PRR disputes. It made the "purpose test" a central guideline. In Goodwin v Curtis [1998] STC 370, courts used this test to deny PRR when the owner briefly lived in a home then rented it out. The court noted the owner’s actions changed the property’s primary use.
Practical Steps for Taxpayers
This case offers direct guidance for PRR claims. Keeping detailed records about reasons and lengths of delays is important. Documents like repair contracts, invoices, or sale records help support claims. Understanding the "purpose test" allows taxpayers to determine if their PRR claim is valid and avoids disputes with tax authorities.
Conclusion
Lewis v Lady Rook [1992] STC 171 is a significant ruling for principal residence relief. The Court of Appeal expanded "residence" beyond physical occupation. The "purpose test" provided a practical method to evaluate PRR claims. This case guides later legal outcomes and assists taxpayers in following CGT rules for main homes. By applying this case’s principles, taxpayers can correctly claim PRR benefits under UK tax law. The decision shows how legal rules and real-world situations impact tax outcomes.
