Taxation – Capital gains tax – Private residence relief – Respondents buying land, demolishing existing house and building new house as main residence until sold for gain – Respondents claiming PRR on whole of gain – Relief being limited to period respondents living in new house – First-tier Tribunal allowing respondents’ appeal – Appellants appealing – Whether “period of ownership” referring to ownership of new house as opposed to land – Appeal dismissed
On 26 October 2010, the respondents bought a plot of land, demolished the existing house and built a new house which they then lived in from 19 March 2013. They claimed private residence relief (PRR) under section 223(1) of the Taxation of the Chargeable Gains Act 1992 on the gain which arose when they sold the plot in May 2014.
Section 223(1) provided that no gain was chargeable “if the dwelling-house… has been the individual’s only or main residence throughout the period of ownership…”. They thus considered all of the gain accruing from 26 October 2010 to 22 May 2014 was eligible for PRR.
The appellant commissioners took the view that PRR was only available for a proportion of the gain. Under section 223(2) of the 1992 Act, that proportion was the fraction calculated by dividing the length of the period of ownership during which the new house was the respondents’ main residence (March 2013 to 22 May 2014) by the longer “period of ownership” of the land (26 October 2010 to 22 May 2014).
The First-tier Tribunal (FTT) allowed the respondents’ appeal against closure notices which amended the respondents’ self-assessments to show a chargeable gain of £541,821. The appellants appealed, contending that the FTT erred in deciding that the “period of ownership” referred to ownership of the new house as opposed to the plot of land.
Held: The appeal was dismissed.
(1) The dispute revolved around the length of the “period of ownership” in the apportionment provision in section 223(2)(b). The question was whether the denominator in the fraction which was used for apportionment referred to the length of ownership of the new dwellinghouse the respondents’ built or to length of ownership of the plot of land on which had once stood the old house which was demolished.
The core remit of PRR and its apportionment provisions was directed to the classic case where someone bought a house, lived in it as their main residence, and then sold it at a gain. The justification for the exemption was that when a person sold their home they frequently needed to acquire a new home elsewhere. It was right to exempt the profit on the sale of the first home from the incidence of capital gains tax so that there was enough money to buy the new home: Sansom v Peay [1976] 1 WLR 1073 considered.
The apportionment provisions relieved only part of the gain where a person did not use the house as their only or main residence. The facts of this case, where land was bought and a dwellinghouse constructed later, or the existing dwellinghouse demolished and a new one built, were not so obviously catered for.
(2) It was plain that the term “period of ownership” in section 223(2)(b) could only refer to the ownership of the dwellinghouse.
Although the drafter had not specified the asset, that simply reflected that the natural reading of the provision referred the period of ownership back to the preceding reference of “dwellinghouse” and, as a matter of language, terms were not repeated or elaborated on where their intended sense was clear. There was no concept of ownership of anything else referred to in the section.
It was also notable that section 222(1) set the scope of the provision by reference to the gain “so far as attributable to… an interest in… a dwellinghouse”. That was the interest to which the “period of ownership” was most obviously concerned. The respondents’ interpretation captured the mainstream case where the dwellinghouse bought was not the respondent’s main residence for all the time it was owned, and did so sensibly. So where, for example, a house which was owned for 10 years, but only lived in as a main residence for the last five years, the taxpayer got 50% relief on the gain, rather than 100%.
The whole focus of the provision was on there being a dwellinghouse. In fact, when the term “land” was mentioned, it referred specifically to land for the person’s occupation and enjoyment of the dwellinghouse.
(3) The crucial and straightforward feature which distinguished an ownership interest in a dwellinghouse in this context from an ownership interest in real property more generally (which would cover ownership of any building on it), was that an ownership interest in a dwelling house required that a dwelling house existed.
There was nothing to suggest that a relief targeted at those who owned property as a main residence would necessarily be concerned with transfers of bare land before the construction of the dwellinghouse.
The relief was on a gain which arose on a disposal – a single event. There was no reason to suppose, from the scheme of the legislation and the words it used, that they disclosed any particular intention on the part of parliament as to the differing circumstances of renovators and demolishers. There was certainly nothing to suggest a legislative preference for relieving cases of renovation over demolition. The legislation’s focus was on the typical situation of a disposal of a property where the dwelling existed throughout. Any disparity in treatment was simply the effect of the words chosen when applied to fact patterns which parliament did not necessarily have in mind when legislating.
(4) Ownership of the dwellinghouse would normally include the ground on which the dwelling was built. There was no need to conceive of it as somehow only referring to the dwellinghouse and excluding the ground. There was nothing necessarily absurd about a period of ownership for PRR purposes hanging off the completion of the dwellinghouse which was resided in and the extent, if any, of any pre-build gain would depend on the market. The provisions did not seek to apportion according to the actual gains occurring over time which might vary, but simply accrued any gain evenly over the period of main residence.
Simon Pritchard (instructed by the General Counsel and Solicitor to HM Revenue and Customs; Laurent Sykes KC (instructed by Haines Watts) appeared for the respondents.
Eileen O’Grady, barrister
Click here to read a transcript of Commissioners of HM Revenue and Customs v Lee and another
