You get relief from Capital Gains Tax on a gain on the disposal of an interest in a dwelling-house which has been your main residence throughout your period of ownership. If it hasn’t been your residence throughout the period of ownership, it’s likely that part of the gain will remain chargeable to tax. So the ‘period of ownership’ can in some cases be crucially important.
But when does your ‘period of ownership’ of the dwelling-house begin?
For example, if you’ve built a house on land that you’ve owned for years, does the ‘period of ownership’ begin when you acquired the land or when the dwelling-house came into existence?
Advisers (and HMRC) thought the question had been settled long ago by a Special Commissioners’ decision on the very point (Henke, [2006] STC (SCD) 561): it’s the date you acquired the land. And the Court of Appeal, in Higgins [2019] EWCA Civ 1860, seems to have proceeded on the assumption that Henke was correctly decided.
Nonetheless the First-tier Tribunal decided last year that Henke was wrong. We commented on it here. Now, in [2023] UKUT 242 (TCC) the Upper Tribunal, rejecting HMRC’s appeal, have agreed: the ‘period of ownership’ runs from the day you start to own the dwelling-house you dispose of, not the underlying land.
The decision, while of assistance to taxpayers (especially self-builders), raises some questions and some anomalies. At what point in the build process do you start to own a dwelling-house rather than a building site? How derelict does a property need to be before its refurbishment and extension turns it into a different dwelling-house with its own period of ownership? How does the rule work when you convert a non-residential property into a dwelling-house?
The Upper Tribunal recognised the complexities potentially arising from their decision but were unpersuaded that they opened the door to construe the phrase in the way HMRC wished: “we find that a textual analysis of the words does not result in ambiguity; in our judgment HMRC’s interpretation plainly is not “equally open” as the taxpayers’.”
Will the Court of Appeal have their say? We must wait and see. Meanwhile, the law is for the time being settled.
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