Local St Albans based Accountant, Chris Wallace, investigates a black hole in HMRC finances and subsequent refund opportunity for self build entrepreneurs in St Albans district and nationally.
What’s the case about?
A couple who bought land 13 years ago to build a new home and then sell it have won a case against the taxman after disputing a £150,000 capital gains bill.
In October 2010, taxpayers Gerald and Sarah Lee bought a house with land for £1.7m. The original house was demolished, and the replacement completed in March 2013. They then occupied the replacement until selling it in May 2014 for nearly £6m, claiming private residence relief (PRR) on the entire gain - on the basis that the replacement house had been their only or main residence throughout the period of ownership.
Since 1965, homeowners who bought a second home were told they could claim the full relief, provided they moved into that second home within two years of buying it. Those who did not – or could not – move in within two years and later decided to sell their property, were told they had to pay capital gains tax on the profits.
HMRC disputed the Lee's interpretation, arguing the gain was subject to apportionment according to the length of time they had occupied the property as divided by the entire period of ownership since October 2010. A closure notice charging a gain of £541,821 was issued.
The taxpayer's appeal was allowed by the first tier tribunal (FTT). Put simply, the issue was whether the period of ownership was the 43 months between the acquisition of the land on which the house was demolished and the sale of the land with the house that was subsequently built, or the 15 months between completion of the newly developed house and the disposal.
What did the Tribunal decide?
The FTT concluded that there was no 'clear definition of period of ownership' in s.223(2) TCGA 1992. It considered that on a natural reading 'period of ownership' meant the 'the period of ownership of the dwelling house that is being sold'.
HMRC appealed on grounds that the FTT erred in determining that the ownership period related to the house, and not the land.
The upper tribunal (UT) agreed with the FTT: “we consider it plain that the “period of ownership” can only refer to the ownership of the dwelling house”.
The UT pointed out “there is nothing to suggest that a relief targeted at those who own property as a main residence would necessarily be concerned with transfers of bare land before the construction of the dwelling house”.
And further: “There is nothing necessarily absurd about a period of ownership for PRR purposes hanging off the completion of the dwelling house which is resided in and the extent if any of any pre-build gain would depend on the market … the provisions do not seek to apportion according to the actual gains occurring over time which might vary, but simply accrue any gain evenly over the period of main residence”.
HMRC finally argued that s.223ZA allowing 24 months from the date of acquisition of land to renovate or construct and move into a dwelling house (previously ESC D49), albeit enacted after the present events took place, would be redundant if the taxpayers’ argument was correct – the construction of the property could never occur ‘during the period beginning with the individual’s period of ownership (ie since acquisition of the land), because the completion of construction itself triggers the start of the period of ownership.
The UT dismissed the point, stating that construction could be substantially complete so as to start the period of ownership, yet an annex could yet to be completed meaning that that would occur ‘during’ the period of ownership. The FTT had also found that the legislation should (quite rightly) be read without reference to the concession.
Who could be affected?
Since 2016, 63,662 individuals and couples have registered self-build projects. In the 2010s – before local councils collected any data on self-builds – around 15,000 self-build homes were being completed annually, according to Joseph Rowntree Foundation estimates. This followed a big uptick in self-builds during the 1990s. Prior to 1990, closer to 2,000 were being built each year. Thousands of people will be affected by the Upper Tribunal's ruling.
No doubt there will be those who will profess that the taxpayers’ interpretation was always correct, and obviously that will include their advisers (albeit at one stage they appear to have agreed that PRR did not apply to the whole gain).
What HMRC seems quite reasonably to fear is that the decision now sets a precedent for sometime property developers to be able to argue a tax-free capital gain, instead of the tedium of income tax and national insurance on trading profits. Proving that land has been acquired with a view to profit, and thus beyond PRR under s.224(3) would be difficult for an ad hoc ‘adventure’, although the trading override for existing property developers would protect against this to an extent.
The UT rejected HMRC’s argument that finding for the taxpayers would favour ‘demolishers’ over ‘renovators’, as pushing the limits of purposive interpretation. It may be that this is another decision where HMRC seek to introduce subsequent anti-avoidance to ‘clarify’ the existing rules, and which could lead to a narrowing of the relief beyond what some thought was a reasonable interpretation in the first place.
In the meantime, as has been suggested by a number of commentators, taxpayers may consider buying a plot, holding onto it for a number of years, gaining planning permission and building a new home, moving in and then selling entirely free of CGT.
Whether the subsequent enactment of ESC D49 changes the interpretation would need to be considered in a future case.
Taking self build tax advice at a local level – St Albans City & District
In 2021 the government launched an initiative to deliver over £150 million funding to kickstart a self building revolution. The £150 million ‘Help to Build’ scheme was launched to make it easier and more affordable for people to build their own homes. With the government further claiming if “we increased to levels similar to the Netherlands, we could see 30-40,000 self and custom build homes built annually”.
Prior to this scheme, the St Albans City & District Local Plan 2020-2036 draft 2018 recommends 3% of new build to be Self Build.
You only have to take a drive around St Albans to see numerous plots of land with houses demolished to provide plots for self builds or small developer builds. In addition to the new self build homes that have been built in recent years. Some making news headlines for a number of reasons, such as this Grand Designs feature home in St Albans City centre.
It goes without saying, if you have undertaken a self build in St Albans, speak to a local accountant to find out if you have a tax claim for overpayments of CGT.
And if you are planning a local self build, take advice even prior to purchasing the land or land and associated dwelling.