Temporary Occupation Does Not Justify Residence Claim

As most people know, there is normally no Capital Gains Tax (CGT) liability on a profit on the sale of your principal private residence (PPR). However, a claim that the PPR exemption applies must be based on the facts of the situation, not just mere intention, as a recent case shows. It involved a man who bought a property with the intention of demolishing the existing house and building a new home in which to live.



The man bought the property, quaintly known as Moles House, in 2003 and demolished the house that was on the site. He built a new house (described as Moles House Two by the court), which he sold in early 2006.



He made no return of the gain on the sale of the house on his Self Assessment return for 2005/2006 and HM Revenue and Customs (HMRC) opened an enquiry on that return in November 2007.



The man claimed no return was required because the property was his main residence and thus PPR relief applied. His argument was based on his assertion that he had lived in the original house and intended to live in the new house. However, when the costs of construction and finance rose beyond his original expectations, he decided to sell Moles House Two when it was complete. He latterly ‘camped out’ in Moles House Two prior to it being sold.



HMRC decided that the demolition of the old house and construction of the new one were carried out with the intention of selling the property when completed and the sale was therefore a taxable transaction to which the PPR exemption did not apply. They raised an assessment to CGT and also a penalty of 60 per cent of the tax due.



It was central to HMRC’s argument that they considered the property to have contained not one but two houses, because of the difference in size, character and value of Moles House Two compared with the original dwelling.



The First-tier Tribunal was split on the correct legal interpretation of ‘dwelling house’. The Tribunal member (the junior member of the Tribunal) considered that ‘where a house is demolished and then reconstructed in order to achieve the same end as extending and remodelling the existing house, only by more cost effective means, the new construction should be regarded as the same dwelling house as that which originally existed’. However, the Tribunal Judge’s view was that ‘the ordinary meaning of the words “dwelling house” refer to the building itself (and may include, as a secondary matter, the land upon which it is situated), rather than refer to the land (and, as a secondary matter, any building that may be situated upon it). If one house is completely demolished and a new house erected in the same location, then the new house is not the same “dwelling house” as the one that previously stood on that site.’



As the senior member of the Tribunal, the Tribunal Judge has a casting vote, which he exercised in favour of his own interpretation.



The Tribunal found that the man had not ‘on a balance of probabilities’ occupied Moles House Two at any time prior to his decision to sell it. Accordingly, PPR relief was not available and the CGT assessment stood.



The man’s claim that the penalty should not stand was also rejected, the judge commenting that the Tribunal was ‘not persuaded that ignorance of his obligations as a taxpayer is of itself a reason for reducing the penalty’.