Mark McLaughlin looks at a recent successful appeal by taxpayers in a private residence relief case, but questions whether the tribunal’s decision should be allowed to stand.
Private residence relief (PRR) for capital gains tax (CGT) purposes is a simple tax relief conceptually – if an individual sells a dwelling house which has been their only or main residence throughout their period of ownership (or throughout that period except for all or any part of the last 18 months), any gain is generally exempt from CGT.
Excuse the delay…
However, complications sometimes arise in practice, for example, in terms of establishing the amount of PRR relief available where there has been a delay between acquiring the house (or acquiring land and building a new one) and occupying the house as the individual’s only or main residence.
Fortunately, an extra-statutory concession (ESC) may come to the rescue in certain circumstances where there is a short delay by the owner-occupier in taking up residence, to mitigate the potential PRR restriction. Concession D49 can apply where the delay in taking up residence is because:
- the individual is building a house on the acquired land;
- alterations or redecorations are being carried out to an existing house;
- the individual still occupies the ‘old’ residence while arrangements are being made to sell it.
What does ‘short delay’ mean? In the above circumstances, HM Revenue and Customs (HMRC) will broadly treat the period before the individual uses the house as their only or main residence as a period of such use for PRR purposes, provided that this period is not more than one year. However, if the delay exceeds one year for good reasons beyond the individual's control, the concessionary period will be extended up to a maximum of two years.
Too late – or is it?
HMRC states that where the individual does not use the house as their only or main residence within the period allowed, no relief will be given for the period before it is so used. In other words, if the delay is longer than the allowed period of up to two years, no relief is available at all under Concession D49; it is not possible to split the period of delay between a ‘relievable’ period of up to two years under Concession D49, and the remaining ‘non-relievable’ period.
However, in McHugh and Anor v Revenue and Customs [2018] UKFTT 403 (TC), the First-tier Tribunal (FTT) had other ideas. In that case, the taxpayers (husband and wife) built themselves a new house between 30 November 2004 and December 2007 and occupied it as their only or main residence from December 2007 until 27 September 2010, when the house was sold. They did not declare a capital gain on the disposal. HMRC considered that the taxpayers were not entitled to any PRR prior to actually moving into the completed property in December 2007, on the basis that Concession D49 did not apply.
The FTT found HMRC’s proposition that if the house building or renovation period exceeded 24 months (i.e. the taxpayer moves into the property more than 24 months after acquiring it), no part of the concessionary period is available to be ‘startling’. The tribunal was in no doubt that ESC D49 laid down a ‘not more than’ concessionary period and that the wording of the concession achieved that intended objective.
The FTT concluded that the taxpayers were entitled to have any gain accruing on the property disposal reckoned after taking advantage of ESC D49. The period of the taxpayers’ reckonable gain was, therefore, to be reduced by 24 months (i.e. the 24-month period immediately prior to the taxpayers taking up residence in the property in December 2007).
A step too far?
As its name indicates, Concession D49 provides concessionary relief. In other words, HMRC is not required by law to apply the relief.
It is generally accepted that the FTT does not have jurisdiction in respect of ESCs (e.g. see Prince and others v Revenue and Customs [2012] UKFTT 157 (TC)). If a taxpayer considers that HMRC should have applied an ESC, or has not applied it correctly, they would normally need to apply to the court for judicial review.
However, in McHugh and Anor, the FTT ruled that Concession D49 should be applied. In doing so, it appears that the FTT exceeded its powers. HMRC seemingly overlooked this point at the appeal hearing. Nevertheless, it is unlikely that HMRC will allow its mistake to go uncorrected, and an appeal against the FTT’s decision on this issue therefore seems likely.
Practical Tip:
HMRC helpfully states (in its Capital Gains manual, at CG65013) that if Concession D49 extends the period of residence in respect of a newly-acquired dwelling and this means that an individual is treated as having two residences for a period, an ‘only or main residence election’ (under TCGA 1992, s 222(5)) in favour of one of them is not required; relief will be available for both residences for that period.
