Mark McLaughlin warns that claims for capital gains tax relief on the sale of a dwelling-house may be open to challenge by HM Revenue and Customs in some cases.
Most individuals who dispose of their dwelling-house assume that any profit on disposal will automatically be tax-free due to capital gains tax (CGT) principal private residence (PPR) relief.
Not so fast…
However, HM Revenue and Customs (HMRC) sometimes challenges the availability of PPR relief in whole or in part. There are several possible lines of attack.
For example, if a dwelling-house was bought, redeveloped, and sold within a relatively short timeframe, HMRC might consider that the transaction was trading in nature. This could result in any profit being liable to income tax (NB income tax ‘trumps’ a CGT charge), so no PPR relief would be available.
Resisting a challenge by HMRC can be difficult, and the outcome will depend on the facts and circumstances. Fortunately for the taxpayers in Eyre & Anor v Revenue and Customs [2025] UKFTT 461 (TC), they were successful in doing so.
Taxpayer success
In that case, the appellants owned a house (HP) in London. On 15 September 2010, they purchased another house (BS). Immediately after contracts were exchanged for BS in June 2010, the appellants looked into renovating BS. An agreement was entered into with a specialist property development business. The appellants demolished BS and built a new house on the same site. The appellants moved into BS on 9 July 2013. They submitted a PPR election to HM Revenue and Customs (HMRC), effective from 13 July 2013. An offer was later made for BS by a prospective buyer; contracts were exchanged on 17 November 2014, and completion took place on 2 February 2015. Subsequently, the appellants moved back to HP. The appellants claimed PPR relief on their sale of BS. However, HMRC considered that its purchase, redevelopment and sale was trading by nature (and liable to income tax); or alternatively, if the sale of BS was subject to CGT, it was not the appellants’ PPR.
However, the First-tier Tribunal (FTT) rejected HMRC’s contention that the appellants’ purchase and sale of BS was a ‘venture in the nature of trade’. The FTT found that in May 2010 the appellants intended to refurbish BS, move in as their home, and sell HP. This remained their intention on 22 June 2010, when contracts were exchanged. As to whether BS was the appellants’ PPR, the FTT found that the appellants had demonstrated the degree of permanence and continuity sufficient to turn “mere occupation into residence” (in accordance with Goodwin v Curtis [1998] 70 TC 476). The FTT found that from 9 July 2013, when the appellants moved into BS, until they moved out in February 2014, the property was their ‘residence’ for PPR relief purposes. Although they had more than one residence, they had nominated BS for CGT purposes from 13 July 2013. Consequently, BS was their main residence from that date until they moved out. The appellants were entitled to PPR relief.
Practical tip
Even if the disposal of a dwelling house is not a trading transaction, an anti-avoidance rule can still result in PPR relief being denied. This rule can apply if the dwelling was acquired wholly or partly for the purpose of realising a gain from its disposal (TCGA 1992, s 224(3)). It is perhaps fortunate that HMRC did not argue this point in Eyre & Anor. Expert professional advice should be sought in cases of doubt.
