The tax authority is considering its response after losing a case in the Court of Appeal relating to Capital Gains Tax on a residential property.
The case relates to an individual, Desmond Higgins, who paid a deposit for a London flat in 2006. At the time he paid the deposit the flat wasn’t built and his purchase was off-plan.
The intervention of the global financial crisis meant construction of the flat was not completed until 2010, at which point Mr Higgins moved in.
When Mr Higgins sold the property in 2012 he claimed private residence relief from Capital Gains Tax, on the basis that the property was his main home at the time he was selling it.
But HMRC argued that Mr Higgins owned the property since 2006, when he exchanged contracts, not 2010 when he moved in, and so for some of the period of time of his ownership it was not his main residence.
The taxman calculated he owed capital gains tax of £61,383 for the tax year 2011/12 - including the period leading up to 2010, when the property had not yet been built.
HMRC won its case in September when the Upper Tribunal decided HMRC was right to apply the tax to the whole period of ownership of a person's property from the moment he bought it off plan.
But Mr Higgins challenged HMRC in the Court of Appeal on the basis that if HMRC’s interpretation was correct, ordinary homeowners would rarely benefit from full CGT relief due to the usual gap between exchange and completion.
The court concluded that this could not have been the intention of parliament.
HMRC then attempted to argue that in most cases the chargeable amount would be minimal and covered by the annual exempt amount or would not be selected for enquiry by HMRC.
The judges of the Court of Appeal said it would be perverse to say the period of ownership begins when a contract to acquire a dwelling is signed, at which time it would be highly unusual for a purchaser to have a right to occupy.
In this case the apartment did not even exist at exchange. The judges said the legislation clearly uses the term ‘period of ownership’ as opposed to referencing the dates of acquisition and disposal.
Elaine Shiels, tax partner at RSM, said: “This decision is a welcome move to address the well-known mismatch between the statutory fiction of this particular rule and the period of ownership for the purposes of PRR.
"Assuming there are no further appeals, the rules would be clear and fair for ordinary homeowners.
"HMRC’s guidance is currently incorrect, stating that ‘a period of ownership begins on the date you first acquired the dwelling house’. Perhaps this will be updated, and HMRC will finally admit defeat.”
A representative of HMRC said: “We are carefully considering the decision of the court.”
david.thorpe@ft.com
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