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When does period of ownership for PRR begin?

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In a verdict that could set a precedent for future cases, a tax tribunal has dismissed HMRC’s argument that a couple were not entitled to full private residence relief on the sale of a house built on land purchased several years before moving in.

20th Oct 2023
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In October 2010, taxpayers Gerald and Sarah Lee bought a house with land for £1.7m. The original house was demolished, and the replacement completed in March 2013. They then occupied the replacement until selling it in May 2014 for nearly £6m, claiming private residence relief (PRR) on the entire gain - on the basis that the replacement house had been their only or main residence throughout the period of ownership.

HMRC disputed that interpretation, arguing the gain was subject to apportionment according to the length of time they had occupied the property as divided by the entire period of ownership since October 2010. A closure notice charging a gain of £541,821 was issued.

The taxpayer's appeal was allowed by the first tier tribunal (FTT). Put simply, the issue was whether the period of ownership was the 43 months between the acquisition of the land on which the house was demolished and the sale of the land with the house that was subsequently built, or the 15 months between completion of the newly developed house and the disposal.

The FTT concluded that there was no 'clear definition of period of ownership' in s.223(2) TCGA 1992. It considered that on a natural reading 'period of ownership' meant the 'the period of ownership of the dwelling house that is being sold'.

HMRC appealed on grounds that the FTT erred in determining that the ownership period related to the house, and not the land.

The upper tribunal (UT) agreed with the FTT: “we consider it plain that the “period of ownership” can only refer to the ownership of the dwelling house”.

The UT pointed out “there is nothing to suggest that a relief targeted at those who own property as a main residence would necessarily be concerned with transfers of bare land before the construction of the dwelling house”.

And further: “There is nothing necessarily absurd about a period of ownership for PRR purposes hanging off the completion of the dwelling house which is resided in and the extent if any of any pre-build gain would depend on the market … the provisions do not seek to apportion according to the actual gains occurring over time which might vary, but simply accrue any gain evenly over the period of main residence”.

HMRC finally argued that s.223ZA allowing 24 months from the date of acquisition of land to renovate or construct and move into a dwelling house (previously ESC D49), albeit enacted after the present events took place, would be redundant if the taxpayers’ argument was correct – the construction of the property could never occur ‘during the period beginning with the individual’s period of ownership (ie since acquisition of the land), because the completion of construction itself triggers the start of the period of ownership.

The UT dismissed the point, stating that construction could be substantially complete so as to start the period of ownership, yet an annex could yet to be completed meaning that that would occur ‘during’ the period of ownership. The FTT had also found that the legislation should (quite rightly) be read without reference to the concession.

Ruling could set a precedent for sometime property developers

No doubt there will be those who will profess that the taxpayers’ interpretation was always correct, and obviously that will include their advisers (albeit at one stage they appear to have agreed that PRR did not apply to the whole gain).

What HMRC seems quite reasonably to fear is that the decision now sets a precedent for sometime property developers to be able to argue a tax-free capital gain, instead of the tedium of income tax and national insurance on trading profits. Proving that land has been acquired with a view to profit, and thus beyond PRR under s.224(3) would be difficult for an ad hoc ‘adventure’, although the trading override for existing property developers would protect against this to an extent.

The UT rejected HMRC’s argument that finding for the taxpayers would favour ‘demolishers’ over ‘renovators’, as pushing the limits of purposive interpretation. It may be that this is another decision where HMRC seek to introduce subsequent anti-avoidance to ‘clarify’ the existing rules, and which could lead to a narrowing of the relief beyond what some thought was a reasonable interpretation in the first place.

In the meantime, as has been suggested by a number of commentators, taxpayers may consider buying a plot, holding onto it for a number of years, gaining planning permission and building a new home, moving in and then selling entirely free of CGT.

Whether the subsequent enactment of ESC D49 changes the interpretation would need to be considered in a future case.

Replies (9)

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By CJaneH
21st Oct 2023 12:34

Serial development of houses has been about for many years. The very short period of occupation before sale implies that this is what this couple are doing. This article does not tell us if they have done this before and/or are planning to do it again. I am suprised at the result as it appears to be 'an adventure in the nature of trade'
Letter of the law has won over spirit of the law.

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Replying to CJaneH:
Pile of Stones
By Beach Accountancy
23rd Oct 2023 09:46

Yes, but HMRC are very quick to rely on the letter of the law (rather than the spirit) when it suits them.

Thanks (2)
Morph
By kevinringer
23rd Oct 2023 09:49

"In the meantime, as has been suggested by a number of commentators, taxpayers may consider buying a plot, holding onto it for a number of years, gaining planning permission and building a new home, moving in and then selling entirely free of CGT."

How would this work when the taxpayer is living in a home that is not the building plot? If this existing home is the taxpayer's principal private residence on which they are entitled to PRR when they sell, how could they subsequently claim PRR on another plot for the same time?

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Replying to kevinringer:
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By dstickl
23rd Oct 2023 10:02

Perhaps the couple were living in a caravan on site, when they were working (from home) on that same site ?

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Replying to kevinringer:
Ray McCann
By Ray McCann
23rd Oct 2023 10:02

Well spotted, it gets tedious reading great what ifs from those who focus only on a narrow part of the law. I think if you buy a plot, build a house and pretty much sell it right away you are asking for trouble. And as you say if you already have a main residence when you buy the plot that is going to be an issue.

Thanks (3)
Replying to RayM55:
Mark Ward
By Mark Ward
23rd Oct 2023 11:09

With respect, that last point is exactly the inference from UT's decision - it matters not that the Lees may have, or may not have had an existing PR when they bought the 'plot' since they could sell their existing residence within 9 months of moving into the developed property and still claim PRR on the entire gains for both the former and latter. UT's decision simply ignores any period of ownership of the plot prior to the completion of and moving into the new home.
I absolutely agree with all comments referencing trading and intention at purchase, and would have expected a greater emphasis on both from HMRC, given the 14 month period of occupation. I can only surmise they thought their basic argument was more than sufficient to deny PRR on the whole gain.

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By Ian McTernan CTA
23rd Oct 2023 10:27

Would have thought HMRC would have been better off trying for 'intention' here rather than apportionment.
A good argument that it was never their intention to reside permanently at the property could have been made: Demolished after bought, then sold as soon as completed looks more like development than PPR, but arguing apportionment wasn't a good idea.

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By Mike Warburton
23rd Oct 2023 15:11

I understand that HMRC are not going to appeal the ruling. However, they must be concerned that this leaves a loop-hole. Why else would they have fought so hard at the tribunal.
They have confirmed that they will be updating their guidance but my concern is that they will press the government to change the legislation to what they believe it should have been all along. Remember that they have form on this because when the Wilkes decision exposed that they had failed to update their discovery provisions they persuaded the government to change the legislation and then applied the change with retrospective effect.

HMRC also say that they always ensure all relevant considerations, including whether ESC B41 applies, are taken into account for any overpayment relief claims made late. However, I cannot see why ESC B41 should not apply in almos all cases like this to extend the time for tax reclaims to be allowed.

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By sherodwilliams
23rd Oct 2023 15:39

I take the point that it may be letter of the law & spirit of the law . I also take the point that HMRC are very much in the frame for "whatever suits our case best".
I tend to agree that if a taxpayer has firstly sold a hose subject to PRR in order to acquire a piece of land upon which they intend to live then that in my mind is a CGT matter and if the second " New build" is sold within 6 months of being built then I see no issue. The chances are as pointed out in another reply, a taxpayer in that situation is most likely living on site in a caravan whilst house 2 is being built. If the taxpayer already has a PRR and stays there throughout the build phase of property 2 then he cannot benefit from PRR twice. The alternative of course is that a taxpayer lives in house 1 for 15 years as his PRR then gets an inheritance from his Great Aunt sufficient to buy property 2 and the land on which it stands. If it is likely to take 24 months to demolish & rebuild he could elect to move his PRR to No 2 upon completion of purchase before it is demolished. House No 1 loses 2 years PRR out of 17 years at that point. House No 2 is demolished & rebuilding starts on the house which has a PRR Election on it. He can sell No2 on the market and continue to live at No1 & in so doing reduces the taxable element or probably removes it altogether.

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