Mark McLaughlin looks at the ‘period of ownership’ for capital gains tax principal private residence relief purposes when a dwelling is demolished and a new one built.
It might sometimes be preferable to demolish a residential property and build a new one, particularly if the old dwelling is severely dilapidated. If the ‘new’ property will be the purchaser’s principal private residence (PPR), the issue arises for capital gains tax (CGT) PPR relief purposes of when the period of ownership commences (i.e., is it when the old property was bought, or when the new property was built?).
This issue was considered by the First-tier Tribunal (FTT) in Lee v Revenue and Customs [2022] UKFTT 175 (TC).
Period of ownership?
In Lee, on 26 October 2010 a married couple jointly purchased a house for £1,679,000. Between October 2010 and March 2013, the original house was demolished, and a new house built (completed on 15 March 2013). On 19 March 2013, the couple took up residence in the new house. On 22 May 2014, the couple sold the new house for £5,995,000.
HM Revenue and Customs (HMRC) subsequently stated that the period between acquisition and the couple moving into the new house was 29 months, and the total ownership period was 43 months (i.e., from acquisition on 26 October 2010 to sale on 22 May 2014). HMRC considered that the amount of PPR relief available should be 18/43rds of the gain arising, being the PPR relief available at the time, including the last 18 months of ownership. The couple appealed, arguing that ‘period of ownership’ meant the period of ownership of the dwelling house. Therefore, as the spouses lived in the house for all but four days of the house’s existence as a ‘dwelling house’ and the total length of occupation was less than 18 months, they contended that PPR relief was due in full.
In considering whether the period of ownership for PPR relief purposes was 43 months (i.e., between the acquisition of the land on which existed the house that was demolished and the sale of the house that was subsequently built), or 15 months (i.e., between when the newly-developed house was completed and the date of disposal), the FTT disagreed with HMRC that ‘dwelling house’ included land. In allowing the couple’s appeal, the FTT held that the natural construction of the legislation was that ‘period of ownership’ referred to the period of ownership of the dwelling house.
On the other hand…
The FTT in Lee noted that the case was not dissimilar to Henke v HMRC [2006] STC (SCD) 561. In Henke, the period of ownership was held to start when the land was purchased. A married couple had purchased the land in 1982 with planning permission for the construction of a house, which commenced in December 1991. The couple took up residence in the house in June 1993. The Special Commissioner held that the ‘throughout the period of ownership’ condition (in TCGA 1992, s 223(1)) was not met. An apportionment was therefore required, limiting PPR relief to the period of ownership from the first occupation of the house as the taxpayers’ PPR in 1993.
However, the FTT in Lee pointed out that Henke was decided by the Special Commissioners and so was not bound by it. The FTT in Lee stated: “The fact that the definition of ‘land’ includes dwelling houses upon that land does not operate in reverse to mean that ‘dwelling house’ should be read to include the land.”
Practical tip
As the decision in Lee (which the taxpayers won) runs contrary to Henke (in HMRC’s favour), an appeal by HMRC in Lee would be unsurprising, so be aware that the ‘period of ownership’ saga for PPR relief purposes might be continued.
