Mark McLaughlin looks at the capital gains tax principal private residence relief position if an old dwelling is demolished and a new one is built in its place.
Principal private residence (PPR) relief broadly applies to gains accruing to individuals on the disposal of (or of an interest in) all or part of a dwelling house which has (or has at any time during their period of ownership) been their only or main residence.
Unrestricted PPR relief normally applies if the house has been the individual’s only or main residence throughout their period of ownership (or throughout their period of ownership except for all or any part of the last nine months).
How long?
If someone buys a dwelling house, has it demolished, and builds a new house on the same land as the old one, does the ‘period of ownership’ for PPR relief purposes relate to the land on which both houses were built, or to the period during which the new house existed?
This distinction can be important for PPR relief purposes. If the period of ownership relates to the land, there will be a period between the old house being demolished and the new house being built when there was no residence to occupy; so there would be a potential restriction in PPR relief on a future disposal. Conversely, if the ‘period of ownership’ relates to the newly-built dwelling, which was occupied as the individual’s only or main residence until its eventual disposal, PPR relief should not be restricted on that basis. But which interpretation of ‘period of ownership’ is correct?
Starting over
In Revenue and Customs v Lee & Anor [2023] UKUT 242 (TCC), in October 2010, Mr and Mrs Lee jointly purchased land for £1,679,000. Between October 2010 and March 2013, the original house was demolished, and a new house built. On 19 March 2013, Mr and Mrs Lee took up residence in their new house. On 22 May 2014, they sold the dwelling for nearly £6m. HM Revenue and Customs (HMRC) enquired into Mr and Mrs Lee’s tax returns for 2014/15.
HMRC noted that the period between Mr and Mrs Lee acquiring and moving into the rebuilt house was 29 months (i.e., October 2010 to March 2013), and the total ownership period was 43 months (i.e., from October 2010 to May 2014). HMRC considered that the PPR relief available should be 18/43rds of the gain, being the PPR relief available at the time for the last 18 months of ownership. Mr and Mrs Lee appealed against HMRC’s restriction in PPR relief. The First-tier Tribunal (FTT) allowed their appeal. HMRC appealed to the Upper Tribunal (UT).
HMRC argued that the FTT made an error in deciding that the ‘period of ownership’ referred to ownership of the new house, as opposed to the plot of land. However, the UT pointed out that the whole focus of PPR relief was on there being a dwelling house. The UT considered that an ownership interest in a dwelling house required that the house existed. Mr and Mrs Lee’s interpretation of the ‘period of ownership’ was accepted.
Practical tip
It has been reported in the professional press that HMRC confirmed it will not be appealing the UT’s decision in Lee. In addition, HMRC has amended its self-assessment helpsheet (HS283) on PPR relief (tinyurl.com/HMRC-HS283) accordingly (at Examples 3 and 5).
