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Confusion over CGT exemption for new homes

Two first tier tribunal (FTT) cases show how a concession to provide purchasers with CGT relief for their new home has been applied differently, depending on how HMRC plays the tribunal rules.

28th Jan 2020
Tax Writer
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New home under contruction

Under concession ESC D49 HMRC permits purchasers of homes, who can’t immediately move into the property, to treat the first period of ownership as a period of deemed occupation.

This allows the CGT exemption: principle private residence exemption (PPR) to apply for that first period.

The three circumstances in which ESC D 49 can apply are where:

  1. the home is under construction;
  2. the home is being renovated or altered; or
  3. the owners are still living in their previous home because they haven’t sold it

The concession allows relief for a period of up to 12 months, although this can be extended to up to two years where there is good reason.

White case

Andrew and Melanie White [TC07434] appealed against HMRC’s decision not to apply ESC D49 to the gain that arose on the disposal of their property.

In 2001 and 2002 the taxpayers purchased four interests in land, which they converted into a single dwelling. Although it is not known exactly when the taxpayers took up residence in the property, it was sometime between September and November 2003.

HMRC argued that the date of acquisition of the property was 11 June 2001, as this was when the taxpayers entered into an unconditional contract for the first part of the property.

As the taxpayers commenced occupation of the property over two years later, they were outside the two-year time limit permitted by ESC D49 to consider the period between acquisition and occupation as a period of occupation for the purposes of PPR.

Appeal stuck out

Before this matter could be considered by the FTT, Judge Philip Gillett had to consider HMRC’s application that the taxpayers’ appeal should be struck out under Rule 8(2)(a) of The Tribunal Procedure (first tier tribunal)(Tax Chamber) Rules 2003 on the grounds that the FTT did not have the jurisdiction to consider the appeal.

Referring to several cases in its decision, the FTT determined that there was nothing in the legislation that required or permitted the FTT to consider ESC D49.

While the FTT could determine the appeal by considering the legislation regarding the availability of PPR, as both parties agreed that the case did not fall within the strict wording of the legislation, the FTT did not need to go further in its consideration.

Consequently, the appeal was struck out on the basis that the FTT did not have the jurisdiction to consider the appeal.

McHugh case

In McHugh [TC06605] the FTT found the taxpayers were able to take advantage of ESC D49 for the two-year maximum afforded by the concession, despite commencing occupation of the property more than two years after its acquisition.

Although there were some similarities between the McHugh case and the Whites’ appeal, the decision of the FTT in the McHugh case was not binding on Judge Gillett’s decision. One other notable difference between the cases was that HMRC did not apply for the McHugh appeal to be struck out under Rule 8(2)(a). 

HMRC’s position on the McHugh decision was made clear in this appeal, with HMRC’s representative noting that, while HMRC did not appeal the McHugh decision to the upper tribunal, this did not imply any approval or acceptance of the decision by HMRC.

End of concession

Such mismatches in appeal cases concerning the FTT’s remit to consider ESC D49 will soon become a thing of the past. As announced at Budget 2018, changes are coming to PPR for disposals made on or after 6 April 2020. As part of these changes the relief given under ESC D49 will be codified in law and the concession will be withdrawn.

The draft Finance Bill 2020 clauses allow for a delay of up to 24 months before moving into the property, but if that 24-month period is breached none of the initial ownership period will qualify for PPR.

It is possible that this cliff-edge will be removed with better drafting of the final version of Finance Bill 2020 when that is published in the spring.

Replies (4)

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By Ian McTernan CTA
29th Jan 2020 11:40

Just once again shows that the PPR rules are not as straightforward as many people would believe, and the devil is in the detail.
More advisers need to make an effort and ensure their clients know what their position is- too many just assume it's all PPR and submit returns on that basis.

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By hiu612
29th Jan 2020 11:52

This is the problem with HMRC taxing by concession rather than in accordance with the strict application of the legislation. Entrepreneurs Relief following a s.135 style reconstruction is a case in point - they infer in their guidance that they'll treat the old and new companies as one and the same, but if a belligerent inspector decides to take the point, that's not what the legislation says and the taxpayers ends up trying to argue in front of the Tribunal based on legitimate expectation or similar. It's why the ESCs were supposed to be being either enacted or scrapped. That process started many years ago, but there seem still to be many in place.

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Replying to hiu612:
By Galaxian
30th Jan 2020 06:38

I can see another problem brewing in connection with buy-to-let incorporations and the application of ESC D32 where the company has taken out new loans to repay the old (rather than the existing loans being novated). If HMRC assert that this is tantamount to cash and deny rollover relief, where does this leave the taxpayer?

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By Ajtms
29th Jan 2020 14:58

Surely Higgins v CRC, Court of Appeal 4 November 2019 now over-rides this enabling taxpayers to enjoy PPR relief from the day that they contract to buy it. Higgins bought off plan in 2006 and completion was not until 2010. Whilst the UT ruled against Higgins, the Court of Appeal correctly over-ruled the UT Tribunal and awarded PPR relief from 2006. Unless HMRC take this to the Lords then this is now the law. Common Sense prevails!

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