In HMRC v G Lee and another [2023] UKUT 242 (TCC) (29 September 2023), the UT dismissed HMRC’s appeal against a decision that a couple were entitled to full private residence relief on the sale of a house which they had constructed on land which they bought several years before moving in, ruling that the ‘period of ownership’ for the purposes of the relief referred to the period of ownership of the house rather than the land.
The taxpayers bought a freehold interest in land in 2010. They demolished the existing house and built a new house which was completed in March 2013. They sold the land (the new house and its gardens and grounds) in May 2024. There was no dispute that the taxpayers were entitled to some private residence relief, but the taxpayers argued full relief was available because the expression ‘period of ownership’ in TCGA 1992 s 222(1) and s 223(2) referred to the length of ownership of the new house. HMRC argued that the period of ownership was the length of ownership of the plot of land. On HMRC’s interpretation, only partial relief would be available.
The FTT had found in favour of the taxpayers and the UT reached the same conclusion. As a matter of straightforward textual interpretation, it was clear that the taxpayer’s interpretation was correct. Considering the immediately surrounding statutory context, the period of ownership could only refer to the ownership of the dwelling house in question. There was no concept of ownership of anything else. Furthermore, there was nothing to suggest that the legislation should be read in a different way. The UT explicitly declined to follow the Special Commissioners’ decision in Henke v HMRC [2006] STC (SCD) 561 which had confirmed HMRC’s approach.
The UT rejected HMRC’s arguments based on the proposition that a dwelling house is not capable of ownership separately from the ground on which its stands. The taxpayers’ interpretation did not involve the notion of separate interests in land and the dwelling house. An ‘interest in a dwelling house’ within s 222(1) would include the ground on which it stands, but the crucial distinction between such an interest and an interest in land more generally was that an interest in a dwelling house required that a dwelling house should exist.
The UT also rejected HMRC’s arguments that the taxpayers’ interpretation would have consequences which could not have been intended. These included that there could be double relief and that full relief could be obtained merely by constructing a cheap shack and living in it before selling a plot of land. In the latter case, HMRC feared that such a scheme would escape the anti-avoidance provision in TCGA 1992 s 224(3). This was not sufficient, the UT held, to strain the natural interpretation of the legislation.
Why it matters: It might seem surprising that the issue raised in this case had not already been resolved even though the rules governing private residence relief have remained broadly the same since CGT was introduced in 1965. There have been a few cases on the issue but the decisions in those have not been easy to reconcile. This UT decision should now provide clarity, subject to any appeal by HMRC.
In HMRC v G Lee and another [2023] UKUT 242 (TCC) (29 September 2023), the UT dismissed HMRC’s appeal against a decision that a couple were entitled to full private residence relief on the sale of a house which they had constructed on land which they bought several years before moving in, ruling that the ‘period of ownership’ for the purposes of the relief referred to the period of ownership of the house rather than the land.
The taxpayers bought a freehold interest in land in 2010. They demolished the existing house and built a new house which was completed in March 2013. They sold the land (the new house and its gardens and grounds) in May 2024. There was no dispute that the taxpayers were entitled to some private residence relief, but the taxpayers argued full relief was available because the expression ‘period of ownership’ in TCGA 1992 s 222(1) and s 223(2) referred to the length of ownership of the new house. HMRC argued that the period of ownership was the length of ownership of the plot of land. On HMRC’s interpretation, only partial relief would be available.
The FTT had found in favour of the taxpayers and the UT reached the same conclusion. As a matter of straightforward textual interpretation, it was clear that the taxpayer’s interpretation was correct. Considering the immediately surrounding statutory context, the period of ownership could only refer to the ownership of the dwelling house in question. There was no concept of ownership of anything else. Furthermore, there was nothing to suggest that the legislation should be read in a different way. The UT explicitly declined to follow the Special Commissioners’ decision in Henke v HMRC [2006] STC (SCD) 561 which had confirmed HMRC’s approach.
The UT rejected HMRC’s arguments based on the proposition that a dwelling house is not capable of ownership separately from the ground on which its stands. The taxpayers’ interpretation did not involve the notion of separate interests in land and the dwelling house. An ‘interest in a dwelling house’ within s 222(1) would include the ground on which it stands, but the crucial distinction between such an interest and an interest in land more generally was that an interest in a dwelling house required that a dwelling house should exist.
The UT also rejected HMRC’s arguments that the taxpayers’ interpretation would have consequences which could not have been intended. These included that there could be double relief and that full relief could be obtained merely by constructing a cheap shack and living in it before selling a plot of land. In the latter case, HMRC feared that such a scheme would escape the anti-avoidance provision in TCGA 1992 s 224(3). This was not sufficient, the UT held, to strain the natural interpretation of the legislation.
Why it matters: It might seem surprising that the issue raised in this case had not already been resolved even though the rules governing private residence relief have remained broadly the same since CGT was introduced in 1965. There have been a few cases on the issue but the decisions in those have not been easy to reconcile. This UT decision should now provide clarity, subject to any appeal by HMRC.
