Lewis v Lady Rook [1992] STC 171 (CA)

Facts

  • In 1982, Lady Rook purchased a property intending to use it as her main residence.
  • Substantial repairs were necessary before she could move into the property, leading to a delay in her physical occupation.
  • Upon selling the property, Lady Rook claimed principal residence relief (PRR) under capital gains tax rules for the period before actual occupation.
  • Tax authorities challenged her PRR claim, arguing relief did not apply to the time prior to physical occupation.
  • The dispute proceeded through the High Court and reached the Court of Appeal.

Issues

  1. Whether physical occupation of a property is required for principal residence relief to apply under capital gains tax rules.
  2. Whether periods prior to or after occupation can be included within the scope of PRR if directly connected to the taxpayer's intention to use the property as a main dwelling.
  3. What role the taxpayer’s purpose and actions play in determining qualification for PRR.

Decision

  • The Court of Appeal overturned the High Court and held that actual physical occupation is not always required for a period to qualify for PRR.
  • The Court established that the period before or after occupation could qualify for PRR if the taxpayer’s purpose was to make the property their main dwelling, such as time needed for essential repairs.
  • The "purpose test" was articulated to consider the taxpayer’s intentions and actions, allowing PRR where delays relate to making or maintaining the property as a main home.
  • Periods where the property was used differently (e.g. rented out) or delays were not clearly linked to establishing the property as a main dwelling would not qualify for relief.

Legal Principles

  • "Residence" for PRR purposes can extend beyond physical occupation to include periods directly connected to the taxpayer’s use of the property as a main dwelling.
  • The "purpose test" assesses whether delays before or after occupation serve the genuine aim of making the property the principal private residence.
  • Relief is limited where periods of claimed residence are interrupted by alternative uses, such as letting, or by delays unrelated to making the property a main dwelling.
  • The decision serves as precedent for future PRR claims, emphasizing a fact-sensitive inquiry into the taxpayer’s intent and conduct.

Conclusion

Lewis v Lady Rook [1992] STC 171 (CA) clarified that principal residence relief depends on the taxpayer’s purpose and connection to the property, not solely on actual occupation. The "purpose test" established by the Court of Appeal remains a central standard for determining PRR eligibility in capital gains tax cases.

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