Private residence relief - when does home ownership begin?

The case

HMRC v Gerald and Sarah Lee 2023 was heard by the Upper Tribunal (UT) and followed the First-tier Tribunal’s (FTT) decision in favour of the Lees (L). The dispute concerned the amount of private residence relief (PRR) that L was entitled to for the capital gain they made from selling their home.

Period of ownership

In October 2010 L bought a property and soon after had it demolished without ever living in it. They built a new house on the land that was completed in March 2013 and which they lived in as their home until it was sold in May 2014. They made a gain from the sale of more than £550,000. They claimed PRR for the whole gain. HMRC said that L’s home only existed for part of the period of ownership (March 2013 to May 2014) whereas the gain accrued over the whole period from October 2010. Therefore, in HMRC’s eyes PRR was limited to the period from March 2013.

HMRC’s appeal

After the FTT kicked HMRC’s argument into touch it appealed to the UT. The arguments put forward from both sides were unchanged and centred on their respective interpretations of the law regarding the meaning of “period of ownership” for PRR purposes.

L’s argument

L stuck with their argument that the asset they made the gain from was the home they built and so ownership for PRR purposes started in 2013. General capital gains tax rules and HMRC’s internal guidance indirectly support this view but the PRR rules say nothing on the topic. In the absence of a specific definition, L’s view was that the natural meaning of the phrase “period of ownership” refers to the asset sold, i.e. their new home.

HMRC’s counter

To bolster its original argument HMRC added two new analogies to support its view. First, the PRR rules are clear that if a person buys a lease on a property and later purchases the freehold, the “period of ownership” starts with the date of the lease purchase. Second, if L and the FTT were correct that ownership for PRR purposes commenced when the new property was completed, it would mean that legislation passed in 2020 - the subject of extensive discussion and a Court of Appeal ruling which confirmed ownership for off-plan homes starts when the contract to buy the plot is signed - would have been unnecessary.

The UT’s ruling

The UT found conflicting evidence supporting both sides, but on balance decided L’s argument gave the right result and so ruled in their favour. It’s unlikely HMRC will appeal against the decision. The ruling sets a precedent for individuals who buy land, with or without buildings on it, who then construct a dwelling and occupy it as their only or main residence. For PRR purposes only, the period of ownership starts when a property is ready to occupy so that when working out the PRR, the relief period before construction can be ignored.