How does HMRC interpret property ownership for CGT relief?

  • Describe the challenge the Lees had in dealing with HMRC over their property transaction
  • Explain what the Lees argued in their defence
  • Describe how HMRC saw their property sale
How does HMRC interpret property ownership for CGT relief?
(Evelyn Paris/Unsplash)

It is a point in UK tax law that any capital gain on the disposal of a residential property is not chargeable to capital gains tax if the property has been a person’s only or main residence throughout the period of ownership.

This relief from CGT is called main residence relief. What is less clear is what period of ownership should be considered if the original property acquired by the individual is demolished and a new property is built on the same land. Is it the period during which the person owned the land itself or the period relating to the new home built on it and which is then sold?

HMRC takes the view that it is the period that the land was owned and restrict the main residence relief accordingly.

This question is vital to those engaged in self-build projects, and to their advisers. 

Crucially, a recent case heard at the UK First-tier Tribunal (Tax) – Lee v Revenue and Customs Commissioners [2002] UKFTT 175 (TC) – determined it is the period of ownership of the dwelling or home that is key. 

Mr and Mrs Lee bought a property for £1.68mn in October 2010. This house was demolished, and a new house built on the land. The whole process was completed in March 2013, and the couple moved into the new house four days after completion to use as their main residence. Then in May 2014, the couple sold the property for £5.99mn. 

HMRC’s arguments

HMRC enquired into the disposal of the property and accepted that the gain realised by Mr and Mrs Lee on the sale of the property did not arise from a property trading activity.

However, HMRC contended that while the new house on the property was the main residence of Mr and Mrs Lee for the period it was occupied, there was a period when the property was not occupied while the new house was being built.

HMRC also said that the whole period of ownership of the land included the time when the old house was acquired. HMRC therefore concluded that there was a considerable taxable gain on the sale, which had not been declared on Mr and Mrs Lee’s tax returns. 

The taxpayers’ arguments

The tax advisers for Mr and Mrs Lee asserted that under a published HMRC extra-statutory concession that applied at the time, the period while the new house was being built should be considered eligible for main residence relief. In brief, the extra statutory concession could apply if there was a delay in occupation of land due to building of a house on it.

This delay could be up to two years in circumstances outside the individual’s control. An extra-statutory concession is, in effect, a relaxation by HMRC in the interpretation of tax legislation that results in a reduction in the tax payable by a taxpayer compared to a strict interpretation of tax law.

Mr and Mrs Lee argued that HMRC should only have considered the period of ownership of the new house, which was sold, when considering the main residence relief from CGT in the legislation.