In Mr George McHugh and Mrs Mary McHugh v HMRC  TC06605 the First Tier Tribunal granted private residence relief for part of the three year period when a house was being built; ESC D49 applied and the homeowners could claim 24 month’s worth of relief.
A gain made on the disposal of an individual’s only or main private residence is exempt from Capital Gains Tax (CGT) under Private residence relief (PRR). HMRC Extra statutory concession (ESC) D49 may apply where an individual acquires land on which they have a house built, which they then use as their only or main residence:
- The period before the individual uses the house as their only or main residence will be treated as a period in which they so used it for the purposes of the relief provided that this period is not more than one year.
- If there are good reasons for the period to exceed one year, which are outside the individual’s control, it will be extended up to a maximum of two years.
- Where the individual does not use the house as his only or main residence within the period allowed, no relief will be given for the period before it is so used.
Mr and Mrs McHugh started building a home in November 2004 and moved in during December 2007:
- They sold the house in 2010 and did not declare the disposal on the basis that PRR applied.
- HMRC raised Discovery assessments and assessed them to CGT for the entire period prior to their occupation of the house in December 2007. Penalties were charged for Deliberate behaviour.
- The McHughs requested a statutory review.
- The reviewing officer agreed that ESC D49 did not apply to relieve any of the pre-occupation gain, referring to an example in HMRC’s Capital Gains tax manual.
- The availability of PRR from December 2007 was not disputed by HMRC.
The FTT allowed the appeal, granting relief for 24 months of the three year period whilst the house was being built and quashing the penalties.
The judge commented that:
- “It would be startling if the man who bought a plot of land and built a house upon it and moved into it after 364 days should be able to discount that period of time for capital gains tax purposes, whereas the man who took two days longer to build his house, loses the right to discount that entire 366 day period for capital gains tax purposes.”
- The guidance and examples in HMRC’s manuals regarding ESCD49 and the extension of the one-year period are wrong and should not be followed.
The McHughs had agreed with the purchaser that they would pay £18,817 for items such as furnishings and furniture claiming to reduce their proceeds for CGT purposes as the items were Chattels. HMRC reduced this by 50% because the items were second hand.
The FTT disagreed; whilst the value was an “as new” value it was not manifestly unrealistic, whereas HMRC’s discount was arbitrary and they had not argued that there was "some kind of tax wheeze afoot".
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