Private Residence Relief Denied – Dream House but not the same Dwelling House

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HMRC Capital Gains Tax PPR Tribunal Cases

Background

In this recent case, the taxpayer Paul Gibson purchased a property called Moles House for £715,000. Mr Gibson decided to demolish the original house (referred to by HMRC as Moles House One) so as to build his dream family house in its place for him and his partner (referred to as Moles House Two.) Demolition and complete reconstruction of the house was deemed as more cost effective than renovating and extending the existing structure.
Following financial difficulties due to the expense of the project and relationship problems, it was decided that the ‘new house’ would be sold upon completion. When the house was sold in February 2006 for approximately £1.5million, the capital gain on the sale of the property was not reported in Mr Gibson’s 2006/07 tax return assuming Private Residence Relief was due under TCGA s.222. HMRC opened an enquiry into that return and issued a closure notice that brought the capital gain on the house into charge as well as subsequent penalties. Mr Gibson appealed against the rejection of PPR and the 50% penalty imposed.

First-tier Tribunal Decisions

The main points considered for whether Private Residence Relief was due in this case were:
1.)     Did Moles House Two constitute the same ‘dwelling house’ as Moles House One according to its ordinary meaning under TCGA s.222(1)?

  • The FTT noted that if an existing dwelling house was fundamentally remodelled and renovated it would still be classified as the same dwelling house.  They considered whether a house that was demolished and reconstructed in order to achieve the same end as remodelling the existing house by a more cost effective means should also be regarded as the same dwelling house.
  • However, the Tribunal Judge ruled that the words of ‘dwelling house’ need to be given their ordinary meaning. ‘Dwelling house’ refers to the building itself rather than to the land. If one house is completely demolished and a new house is built in its place, then the new house is not the same ‘dwelling house.’
  • Mr Gibson’s case was weakened by the fact that the two houses were built out of different materials and it was not built on the same foundations; it wasn’t considered as the same house physically.  Perhaps the outcome would have been different if the materials from Moles House One were recycled and used to build Moles House Two in the same plan as before?  His case was also weakened by his own reference to Moles House Two as the ‘new house’ in his testimony.

On the grounds of the meaning of ‘dwelling house’, Moles House Two was found to be a different dwelling and Mr Gibson would not to be entitled to Private Residence Relief unless he had resided in the new dwelling. 
2.)     Was Moles House One and subsequently Moles House Two the individual’s only or main residence throughout the period of ownership?

  • HMRC argued that a dwelling house must be physically occupied by the individual during their period of ownership for it to be their only or main residence and for relief to apply. The intention to occupy a dwelling house but having to sell it for unforeseen reasons does not qualify the individual for relief.
  • It was accepted by all parties that Moles House One had been Mr Gibson’s main and permanent residence.
  • It was only revealed during the course of the court proceedings that he had ‘lived’ in Moles House Two following its completion. However, Mr Gibson had only ‘camped’ at Moles House Two during the process of the sale and had not occupied the reconstructed property at any other time prior to his decision to sell it. He had also testified that permanent residence in the property was not possible before the construction of Moles House Two was complete.
  • Occupation of a property does not equate to residence unless it becomes a person’s home.

As the newly constructed house was not considered as the principal residence of Mr Gibson, the claim for PPR was rejected on this point too.
Despite Mr Gibson’s appeal being rejected in its entirety, if a couple of circumstances had differed slightly in this case then the outcome may have been different.  The intricate facts of each case are vitally important and taking advice before undertaking transactions can allow the position to be considered and, perhaps corrected, in advance.