In HMRC v Gerald and Sarah Lee [2023] UKUT 242, the Upper Tribunal (UT) found that Private Residence Relief applied to the entire gain on a main residence built on the site of a previously demolished property. The dwelling house existed for a quarter of the time that the land had been owned, but the period of ownership test related to the house only.

  • The taxpayers bought a plot of land on 26 October 2010, demolishing the existing house and building a new house which they then lived in from 19 March 2013.
  • They sold the new property on 22 May 2014 and claimed Private Residence Relief (PRR) on the gain. The property had been their only or main residence throughout the period of ownership.
  • HMRC disputed the claim and issued Closure Notices on the basis that PRR was only available for the period of residence spanning March 2013 to 22 May 2014. HMRC's position was that: 
    • The total gain related to the land in its entirety (including the dwelling house from 2013), the ownership of which went back to 2010.
    • PRR was unavailable until the dwelling house was available to occupy. This meant the gain relating to the period October 2010 to March 2013 was not exempt and PRR needed to be apportioned.
  • The taxpayer Appealed to the First Tier Tribunal (FTT) on the basis that the legislation was clear: the qualifying period of ownership for which occupation as a main residence was required was that of the ownership of the dwelling house only. The FTT agreed.
  • HMRC appealed to the Upper Tribunal (UT).

The UT found that:

  • The statutory interpretation of ‘Period of Ownership’ in s.222 and s.223 TCGA 1992 was that it referred to ownership of a 'dwelling house' and not the land.
  • Whether 'period of ownership' actually referred to the land was the crux of HMRC’s appeal but the UT considered HMRC’s other arguments to understand whether a wider interpretation was required.
  • If the asset to which the period of ownership related was the land, specific and clear referencing was absent:
    • Land is only referenced in the context of occupation and enjoyment of the dwelling house.
    • Examples in other parts of TCGA that refer to periods of ownership of specific assets, mention those assets explicitly if not obvious from the wording.
  • HMRC’s contention that the FTT’s reasoning placed too much weight on reliefs where the qualifying period did not necessarily match the period of ownership was incorrect. The FTT’s consideration of Business Asset Disposal Relief and the Substantial Shareholding Exemption were provided as examples only.
  • Anti-abuse legislation and concerns over double relief could run in parallel to the statutory interpretation. In fact, the availability of PRR for the last 18 months (nine months from April 2020) of ownership regardless of occupancy is a clear example of double relief.

The statutory interpretation upheld by the FTT was correct and needed no wider interpretation. HMRC’s appeal was dismissed.

Useful guides on this topic

PRR: Private Residence Relief 
What is Private Residence relief (PRR)? What are the qualifying conditions? Can you claim relief on two homes? How do you claim PRR? Can you claim PRR if you develop your garden?

Residential Property gains
The definition of 'Residential Property' is important for Capital Gains Tax (CGT) purposes when considering how a gain is reported when tax is paid and the rates of tax that apply. What is a Residential Property gain?  

How to appeal an HMRC decision
Disagree with an HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External links

HMRC v Gerald and Sarah Lee [2023] UKUT 00242 (TCC)

Gerald and Sarah Lee v HMRC [2022] TC 8502


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