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A recent case has bought into sharp focus the position on Principle Residence Relief when building a new home to replace an existing home. In the case of HMRC v Gerald and Sarah Lee 2023, the Upper Tribunal (UT) ruled in favour of the Lees (L) regarding the amount of private residence relief (PRR) they were entitled to for the capital gain from selling their home.
The key issue was the interpretation of the “period of ownership” for PRR purposes. The Lees had bought a property in October 2010, demolished it, and built a new house on the land, completed in March 2013. They lived in this new home until it was sold in May 2014, making a substantial gain of £550,000. The Lees claimed PRR for the entire gain, while HMRC argued that PRR should be limited to the period from March 2013 to May 2014, as the home only existed during that time.
The UT considered both arguments and found conflicting evidence. However, it ultimately ruled in favour of the Lees, stating that their interpretation of the “period of ownership” was correct. The UT determined that for PRR purposes, the period of ownership begins when a property is ready to occupy. In this case, since the Lees occupied the new home from March 2013, the entire capital gain qualified for PRR, and therefore, it was not taxable.
This ruling sets a precedent for individuals who buy land, construct a dwelling on it, and occupy it as their main residence. According to the UT, for PRR calculations, the period of ownership starts when the property is ready to occupy, allowing the relief period before construction to be ignored. The decision suggests that if land is purchased, and a dwelling is later built on it, the PRR period of ownership begins when the property is ready for occupation.
As can be seen from the above this can be a complex area of tax. If you are considering a similar project, be sure you are eligible for PRR in your circumstances.
If you have any further queries on this subject please reach out to us at 01902 711370 or email enquiries@uklandlordtax.co.uk.
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