It is a point of UK tax law that any gain on the disposal of residential property is not subject to capital gains tax if the property has been the sole or principal residence of the owner. a person throughout the period of ownership.
This CGT allowance is called the principal residence allowance. What is less clear is what period of ownership should be considered if the original property acquired by the individual is demolished and a new property is built on the same land. Is it the period during which the person owned the land itself or the period relating to the new dwelling which is built on it and which is then sold?
HMRC considers this to be the period the land has been owned and limits principal residence relief accordingly.
This question is vital for those who engage in self-build projects, and for their advisors.
Basically a recent case heard by the UK First Tier Court (Taxation) – Lee v Revenue and Customs Commissioners  UKFTT 175 (TC) – determined that it is the period of ownership of the dwelling or house that is key.
Mr and Mrs Lee bought a property for £1.68million in October 2010. This house was demolished and a new house was built on the land. The whole process was completed in March 2013 and the couple moved into the new house four days after completion to use as their primary residence. Then in May 2014, the couple sold the property for £5.99million.
HMRC investigated the disposal of the property and accepted that the gain made by Mr and Mrs Lee on the sale of the property did not result from property trading activity.
However, HMRC argued that while the new house on the property was Mr and Mrs Lee’s main residence during the period it was occupied, there was a period when the property was unoccupied during the construction of the new home.
HMRC also said the entire period of ownership of the land included when the old house was acquired. HMRC therefore concluded that there was a considerable taxable gain on the sale, which had not been declared on Mr and Mrs Lee’s tax returns.
The arguments of the taxpayers
Tax advisers to Mr and Mrs Lee claimed that under an extra-legal concession issued by HMRC which applied at the time, the period during which the new house was being built should be considered as eligible for principal residence relief. In short, the additional statutory concession could apply if there was a delay in occupying the land due to the construction of a house on it.
This delay can be up to two years in circumstances beyond the control of the person. A extra-legal concession is, in effect, a relaxation by HMRC in the interpretation of the tax law which results in a reduction in the tax payable by a taxpayer compared to a strict interpretation of the tax law.
Mr and Mrs Lee argued that HMRC should only have taken into account the period of ownership of the new house, which was sold, when considering CGT relief for principal residence in the legislation .