In the recent case of McHugh v HMRC (2018 UKFTT 403 TC), the First Tier Tax (FTT) Tribunal were asked to consider the question of whether private residence relief from capital gains tax (CGT) should be given in respect of any part of a three-year period of ownership that preceded the taxpayer’s occupation of the property.
As you most likely will be aware, gains made on sale of a taxpayer’s main residence are usually exempt from CGT by virtue of principal private residence (PPR) relief. If, however, the taxpayer has not occupied the property as his main residence for the entire period of ownership, part of the gain may be subject to tax, normally when you rent out your property for a number of years after it being your main home, before selling it. In such cases, the gain is apportioned between periods of occupation and periods of non-occupation to determine how much of the gain should be relieved and what proportion should be chargeable. In this respect, certain absences will qualify as ‘deemed’ periods of occupation despite the fact that the taxpayer may have lived elsewhere during that time. These deemed periods of occupation include, among others, the final 18 months of ownership.
In addition, there is an extra-statutory concession (ESC D49) which allows relief where there is a delay in taking up occupation after acquisition of the property/land either because a house is to be built on the acquired land, or the purchaser was either unable to sell their old home immediately or they needed to carry out renovation or refurbishment works to the new property before they could move in. The concession allows relief for a period up to 12 months, although where there are good reasons for the period exceeding 12 months which are outside the individual’s control the period may be extended up to two years. If the build or renovation period exceeds 24 months, so that the taxpayer does not move into the property for more than 24 months after acquiring it, HMRC’s CGT Manual states that no part of the extra statutory concessionary period will be available to the taxpayer.
In the McHugh case, the taxpayers had acquired the land in 2004 to build themselves a new house. They occupied the new build as their principal private residence from the end of 2007 until they sold it in September 2010. As the period between their acquisition and their occupation of the property was more than two years, Mr and Mrs McHugh did not meet the published terms of the concession and HMRC determined that the part of the gain corresponding to the three-year period of non-occupation was therefore chargeable to CGT.
Mr and Mrs McHugh appealed to the First-tier Tribunal who ruled that HMRC’s interpretation of ESC D49 was ‘absurd and unfair’, and although the tax officer had followed an example set out in its CGT manual, this example was incorrect ‘and should not be applied or followed’. Instead, in cases where a build or renovation takes longer than the 12 or 24-month period, as appropriate, the concessionary period should be limited to a maximum of 24 months – not disallowed altogether. Accordingly, the taxpayer’s appeal was allowed and the chargeable period was reduced by 24 months.
Whilst this is obviously good news for Mr and Mrs McHugh, it is a word of caution that although July showed a budget surplus for the Treasury, this is not normally the case and the Government and their departments, are ensuring they collect event penny of tax due, or that they think could be due!