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03
Mar

Principal Private Residence Relief pitfall

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It is normally assumed that the sale of a main domestic residence will be eligible for relief from capital gains tax. However, a recent tax case has highlighted a possible pitfall.

In the case in question the taxpayer, after buying a house decided that due to the work that was needed to bring it up to scratch it would be cheaper to demolish the house and build a new one. However, financial difficulties during the reconstruction meant that he was forced to sell the property. By his own admission he only occupied the property on a “camping” type of basis.

He did not declare the gain he made. H M Revenue & Customs became aware of the sale of the property and took the view that a gain ought to have been declared.

The case went before the first tier tribunal (FTT) and it is the comment of the tribunal chairman that are of particular interest.

Notwithstanding the fact that the old house had been occupied to such an extent that the quality was such that the Principal Private Residence (PPR) relief would have been available, he took the view that the new house was not the same as the old house even though the footprint was the same, and as it had not been occupied to a sufficient extent it was not eligible for PPR relief. The other tribunal member disagreed however, the chairman, exercising his casting vote, carried the day in the favour of H M Revenue & Customs.

The upshot of this case is to highlight first of all that there needs to be a certain quality in occupation and secondly that if there is a demolition of a property, the new house would not be regarded as the same as the old house and thus the time period of owner occupation may well be shorter that the period of ownership when determining the amount of gain which is eligible for PPR relief.

Of further interest is that technical commentators have highlighted that this is the first case of it’s kind that has been brought before tribunals and apart from an apparent unfairness in the case no one has yet put forward a reasonable argument to suggest the decision is incorrect. Whilst the matter was only heard at the first tier tribunal and is not therefore binding, it is certainly persuasive and it would be interesting to see if anyone will take a similar case with a view to overturning the decision.

The decision further shows that each case needs to be considered on it’s own merits and in what was thought to be a straightforward situation turned out to be the opposite and if you are contemplating the sale of a main domestic residence which at some time in the period of ownership has not been fully occupied as a main domestic residence then please take advice.

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