In HMRC v Lee & Another v HMRC [2023] UKUT 00242 (TCC), the Upper Tribunal (UT) upheld the First-tier Tribunal's (FTT) decision and dismissed HMRC’s appeal against a decision that a married couple were entitled to full private residence relief on the sale of a house which they had constructed on land which they bought several years before moving in, ruling that the ‘period of ownership’ for the purposes of the relief referred to the period of ownership of the house rather than the land.

Background

In October 2010, Gerald and Sarah Lee (the Appellants) purchased a freehold interest in land for £1,679,000. Between October 2010 and March 2013, the land was redeveloped, with the original house on the land demolished and a new house built.

The new house was completed and the Appellants took up residence in March 2013, occupying and enjoying the rest of the land as the garden and grounds of the dwelling.

In May 2014, the Appellants sold their interests in the land for £5,995,000 and subsequently filed self-assessment tax returns. HMRC enquired into the Appellants' tax returns and in September 2019 issued closure notices to the Appellants on the basis that a chargeable capital gain of £541,821 had been omitted from their returns.

The decision was upheld following review by an HMRC officer who determined that the period of ownership was 43 months, being the period from the date the land was acquired in 2010 until the land was sold in May 2014. Accordingly, the amount of private residence relief (PRR) available to the Appellants under section 223, Taxation of Chargeable Gains Act 1992 (TCGA), was only 18/43rds of the gain arising.

The Appellants appealed HMRC's decisions to the FTT, arguing that "period of ownership", for the purposes of the PRR, referred to ownership of the dwelling-house concerned and not the land. Since they had lived in the house for all but four days of its existence as a "dwelling-house" and the total length of occupation was less than 18 months, the Appellants contended they were entitled to full PRR, under section 223(1), TCGA.

FTT decision

The appeals were allowed.

The FTT considered that because there was no clear definition of "period of ownership", sections 222 and 223, TCGA, should be given a natural construction unless to do so would lead to a clear anomaly contrary to the intention of Parliament. In the FTT's view, the natural reading of the legislation was such that "period of ownership" meant the period of ownership of the dwelling-house that was being sold and not the land on which it was built.

While acknowledging that its decision was contrary to the Special Commissioners' decision in Henke v HMRC [2006] STC (SCD) 561, the FTT noted that in every part of the relevant legislation, the period of ownership appeared to attach to the dwelling-house where the taxpayer may or may not reside. No mention was made to land in the context of period of ownership. Further, the FTT rejected HMRC's argument that dwelling-house should be read to include land, as the fact the definition of "land" in section 228(1), TCGA, included dwelling-houses on that land, did not mean that the converse was true. Rather, the fact that dwelling-house was referred to in the legislation meant it was capable of being treated, for some purposes, separately to land.

While both HMRC and the Appellants referred to various anomalies that might arise on the other's construction of the legislation, the FTT noted that the legislation relating to apportionment had always contained anomalies due to apportioning being based on time rather than on valuations at specific points in time. The FTT did not consider that the anomalies identified by the parties required the legislation to be read in a way contrary to its natural meaning and concluded that there were no compelling reasons to depart from the natural reading of the legislation that "period of ownership" referred to the period of ownership of the dwelling-house.

The FTT decision can be viewed here.

HMRC appealed to the UT.

UT decision

The appeal was dismissed.

The UT reached the same conclusion as the FTT. As a matter of textual interpretation, it was clear that the Appellants' interpretation was correct. Considering the immediately surrounding statutory context, the period of ownership could only refer to the ownership of the dwelling house in question. There was no concept of ownership of anything else. Further, there was nothing to suggest that the legislation should be read in a different way. The UT explicitly declined to follow the Special Commissioners’ decision in Henke, which had confirmed HMRC’s approach.

The UT rejected HMRC’s arguments based on the suggestion that a dwelling house was not capable of ownership separately from the ground on which it stood. The Appellants' interpretation did not involve the notion of separate interests in land and the dwelling house. An "interest in a dwelling house", for the purposes of section 222(1), would include the ground on which it stood, but the crucial distinction between such an interest and an interest in land more generally, was that an interest in a dwelling house required that a dwelling house should exist.

The UT also rejected HMRC’s arguments that the Appellants' interpretation would have consequences which could not have been intended by Parliament. These included that there could be double relief and that full relief could be obtained merely by constructing a cheap shack and living in it before selling a plot of land. In the latter case, HMRC feared that such a scheme would escape the anti-avoidance provision in section 224(3), TCGA. In the view of the FTT, this was not sufficient to strain the natural interpretation of the legislation.

The UT decision can be viewed here.

Comment

It is surprising that the issue in this case has not been previously clarified by the courts given that the rules governing PRR have remained broadly the same since CGT was introduced in 1965.

Whilst there have been a few decisions on this issue since that time, none have been in alignment, and none have been as clear as the decision of the UT in this case, which provides some clarity to other taxpayers who may find themselves in a similar position to the Appellants. Given the wider importance of this decision, it would not be surprising if HMRC sought to appeal the decision to the Court of Appeal. Watch this space.