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‘Period of ownership’ meaning key to PRR case | house key | Accountingweb
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Meaning of ‘period of ownership’ key to PRR case

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In an unexpected win for the taxpayers, the tribunal found that the meaning of “period of ownership” for private residence relief (PRR) purposes was the period of ownership of the dwelling house being sold, not the land.

2nd Sep 2022
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In October 2010, Gerald and Sarah Lee jointly purchased a freehold interest in land, 8 Nuns Walk, for £1.679m. Between October 2010 and March 2013, the land was redeveloped. The original house was demolished and a replacement house was built. The new house was completed in March 2013.

At that time, the Lees took up residence in the new house, occupying and enjoying the rest of the land as the garden and grounds of that dwelling. In May 2014, the Lees sold their interests in the land at 8 Nuns Walk for £5.995m.

In January 2017, HMRC enquired into the taxpayers’ 2014/15 tax returns and, after some back and forth, issued closure notices in September 2019.

HMRC concluded that the Lees’ total ownership period was 43 months between the date of acquisition in October 2010 and the sale in May 2014, and that private residence relief (PRR) would be available for 18/43rds of the gain arising – the taxpayers being eligible for the final period exemption of 18 months as it was at that time (it has since reduced to nine months). 

As a result, HMRC determined that a chargeable capital gain of some £540,000 had been omitted from both taxpayers’ 2014/15 returns. The Lees appealed [TC08502].

Period of ownership

The first tier tribunal (FTT) essentially had to answer the question of whether the period of ownership, for private residence relief purposes, was (as HMRC argued) the 43 months between the initial acquisition in October 2010 and the sale in May 2014, or whether it was (as the taxpayers argued) the 15 months between when the newly developed house was completed and the date of disposal (meaning, in that instance, the gain would be exempt by virtue of section 223(1) TCGA 1992).

Both parties submitted numerous arguments, but key submissions were as follows:

  • HMRC argued that one asset was bought, and that asset was sold, and that, as a matter of construction, “period of ownership” in the legislation clearly refers to land.
  • The taxpayers argued that the legislation was clear that “period of ownership” relates to the dwelling house.

Dwelling house

Although the FTT agreed with HMRC in so far as a single asset was purchased and then subsequently sold, that was where agreement seemingly ended. 

The FTT did not agree with HMRC that “dwelling house” should be read to include land, commenting that the fact “dwelling house” is used in the legislation meant it was capable of being treated for some purposes as separate to land within the same title. 

As a result, the FTT agreed with the taxpayers (who were represented by a QC) that the natural construction of the legislation was that “period of ownership” referred to period of ownership of the dwelling house.

The FTT further reasoned that just because the case dealt with one asset, that did not mean the PRR legislation had to operate on the period of ownership of that one asset. Rather, as the FTT continued: “The legislation works to calculate a gain on an asset, and then to determine whether, and if so how much, relief applies to that gain. We are looking here at the relief part of the legislation, which operates separately to how to calculate the gain.”

Ultimately, the FTT summarised that while it did not think that there was a clear definition of period of ownership in the legislation for PRR purposes, the natural reading of the legislation was that “period of ownership” meant the period of ownership of the dwelling house that is being sold. 

The appeal was allowed.

Henke passed over

The FTT mentioned Henke vs Revenue & Customs Commissioners [2006] STC (SCD) 561 in its decision. In that case, the “period of ownership” was found to have started when the land was purchased, based on the fact that a single asset was owned throughout the period, and that it would have been contrary to the wishes of Parliament to allow full relief on the whole asset based on living in a dwelling house for only part of the period of ownership of the land.

However, as Henke related to a decision by the Special Commissioners, it was not binding on the FTT (and indeed, the FTT took a completely different approach in this case).

In fact, given the FTT’s conclusions, it would be entirely unsurprising should HMRC appeal this case to the upper tribunal.

Replies (6)

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By CJaneH
02nd Sep 2022 14:09

Looking at the period of residence it looks like the couple may well be serially building new residences and moving on to the next project using PPR to escape CGT.

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Replying to CJaneH:
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By Beef curtains
02nd Sep 2022 16:15

And jolly good luck to them. As Clyde LLJ (paraphrased) said, in 1929, no person need arrange his affairs so as to enable the Revenue to take the shirt of his back

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Replying to CJaneH:
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By Beef curtains
02nd Sep 2022 16:16

And jolly good luck to them. As Clyde LLJ (paraphrased) said, in 1929, no person need arrange his affairs so as to enable the Revenue to take the shirt of his back

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Replying to Beef curtains:
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By Caber Feidh
06th Sep 2022 00:46

Not quite.
Lord Clyde (not Lord Justice Clyde) said in in Ayrshire Pullman Motor Services and D M Ritchie v The Commissioners of Inland Revenue (1929) 14 TC 754 at 763:
"No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores."

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By vstrad
05th Sep 2022 13:46

Well, I'm no lawyer, but it seems passing strange for HMRC to seek to apply rules about residence relief to a piece of land with no residence.

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