Private Residence Relief win at Upper Tribunal for the taxpayer

In a late September 2023 judgement HMRC v Gerald Lee and Sarah Lee, the Upper Tribunal (UT) found that the ‘period of ownership’ for Private Residence Relief (PRR) purposes, refers to the ownership of the dwelling house and not the land on which it was built.

Gerald and Sarah Lee purchased a plot of land in October 2010. The original house was demolished, and a replacement house built, which they occupied from March 2013. In May 2014, Mr and Mrs Lee sold their interest in the land and submitted their tax returns on the basis that the entire capital gain was covered by the PRR exemption.

HMRC argued that Mr and Mrs Lee did not occupy the property for the full period of ownership (from October 2010 to May 2014) and that they would only qualify for the final period exemption of 18 months. HMRC concluded that a gain of £541,821 had been omitted from each taxpayer’s return.

In 2022, the Lees successfully appealed to the First Tier Tribunal (FTT) which agreed that the period of ownership for PRR purposes was the
15 months from when the new house was completed to the date of disposal. HMRC subsequently appealed to the UT, which agreed with the FTT’s decision and HMRC’s appeal was dismissed.

This is potentially good news for taxpayers. Essentially, a plot of land could be purchased and left vacant for several years, after which a house is built and immediately occupied as the principal private residence until sale. Although the house is on the land for a short time, the full PRR exemption could be claimed.

The UT’s decision has also opened up wider tax planning opportunities, including a more tax efficient analysis when building and immediately moving into a new property in the garden of an existing house. Any gain on the sale of the original house could qualify for the full PRR exemption. In addition, any gain on the future sale of the new property could also be covered by the full exemption if it was occupied for the full period of ownership (starting on the date on which the property was completed, not when the original land was acquired).

In recent years, a number of changes have meant that individuals are suffering higher Capital Gains Tax (CGT) liabilities. From 6 April 2020, the final period exemption was reduced from 18 months to nine months and the PR letting relief was restricted. From 6 April 2023, the annual CGT exemption was reduced from £12,300 to £6,000 and will be further reduced to £3,000 from 6 April 2024. The CGT on the disposal of residential property is also 8% higher than on other assets, making the benefit of PRR more valuable.

HMRC has confirmed that they will not appeal this case to the Court of Appeal. However, it is possible that legislative changes could be made to amend the position. In the meantime, to discuss your options and how the changes might affect you in relation to a previous disposal or one that may be contemplated, please get in touch with your usual Crowe contact.