A complete or partial exemption from Capital Gains Tax (‘CGT’) on a gain made on disposal of a dwelling-house (or part of a dwelling-house) that is your ‘main residence’ has been a feature of CGT since its earliest days. It’s surprising that in some respects its scope remains unclear nearly 60 years later.
Full relief requires the dwelling-house to have been your main residence throughout your ‘period of ownership’. Exactly when that period begins and ends was unclear until the Court of Appeal held in 2019, in a case involving a flat purchased off-plan, that it was the date of completion, not exchange of contracts, that mattered.
Although tax law refers to a gain on the disposal of a dwelling-house, you don’t as a matter of law (or, at least, of English law) dispose of a dwelling-house: what you dispose of is the freehold or leasehold interest in a piece of land, albeit that that interest may derive much of its value from the fact that there is a building on it. Essentially, your purchaser buys the land and gets the house free.
This can lead to difficulty if you’ve owned the land longer than you’ve owned the dwelling-house: as for example if you’ve built a house on land which you previously held as bare land or with some non-residential building on it. Does your ‘period of ownership’ run from the date you acquired the land (which would be bad news, since exemption would in that case be restricted to exclude the period before the dwelling-house existed); or does it start only when the dwelling-house comes into existence?
Three different cases
In 2006 the Special Commissioners (predecessors of the First-tier Tribunal) ruled, in Henke, that it started from the acquisition of the land, and that the gain had to be apportioned on a time basis to determine what relief was available.
In 2022, the First-tier Tribunal declined to follow the Special Commissioners’ ruling and held that the ‘period of ownership’ referred to the house, not the land: so could not start before the house existed.
Meanwhile, in 2017 the First-tier Tribunal had (sort of) followed Henke, holding that ‘period of ownership’ did indeed refer to the land, but that it didn’t seem appropriate to apportion the gain on a time basis when as a matter of fact most of the gain was attributable to the dwelling-house so ruled that a ‘fairer’ basis of apportionment should be applied to the case before it.
So three cases, three different decisions. None of them binding authority.
HMRC’s published guidance remains resolutely silent, with nary a word of any of the three cases cited. Probably HMRC would take, at least initially, the position that Henke was correctly decided. Whether that position would survive a fresh challenge before the First-tier Tribunal and beyond remains to be seen. Meanwhile, the planning assumption should be that Henke would apply unless you have the pockets and the heart for a fight with HMRC.
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