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Demolition, Development and Capital Gains Tax

Posted on 19 August 2022

Every so often, a tax case is decided in favour of the taxpayer which raises an eyebrow or two. The case of Lee & Lee v HMRC is one of those.

Mr and Mrs Lee bought a house with some attached land in October 2010. They didn't move in but instead demolished it and built a new house. That took almost three years. In March 2013 they moved in and then sold it in May 2014 for almost £6 million, making a very significant profit. They claimed full capital gains tax (CGT) relief on the basis that the new house had been their main residence throughout the period they owned it. Not surprisingly, HMRC disagreed and denied relief for most of the period, October 2010 to March 2013, before Mr and Mrs Lee moved into the new house. That resulted in a tax assessment for each of them of over £500,000.

There was a concessionary rule that allowed someone to benefit from CGT main residence relief for the period before they had moved in where they were doing works to the property. However, that was limited to 12 months (and exceptionally 24 months, but certainly not 29 months as was the case here). There's also a rule that allows main residence relief for the final 18 (now nine) months of ownership, even if someone didn't live in the property during any or all of that 18-month period (although in fact Mr and Mrs Lee did occupy it as their main residence for 14 of those final 18 months). So HMRC argued that the total period of ownership of the land was 43 months but only the last 18 months qualified for relief, meaning that 18/43rds of the total gain was exempt and the remainder was taxable. Mr and Mrs Lee appealed to the First Tier Tribunal (FTT).

The FTT was persuaded by Mr and Mrs Lee's argument that the relevant period of ownership related to the house being sold rather than the land on which it sat. The new house was only completed in March 2013 and the Lees moved in almost immediately. When they sold it, they were entitled to full main residence relief on the basis that it had been occupied as their main residence throughout their period of ownership of it, "it" being the new house. The fact that they had bought the original house and plot several years earlier was neither here nor there. Nor, it seems, was the fact that the Lees spent a fortune on building their new dream house and then decided to sell it just a year after moving in, even though main residence relief is not meant to be available at all if the house was acquired for the purpose of making a gain from its disposal. That particular point wasn't even raised by HMRC, perhaps because Mr and Mrs Lee had good reasons for selling it so quickly.

The decision is potentially good news for those who buy a house and demolish it (or just buy an empty plot), apply for planning permission and then build a new house. That process can take many years and yet if the owner moves in to the new house, even for a short time, and then sells it, the entire gain could be exempt from CGT. A word of warning, however – HMRC may appeal and even if they don't, it's worth noting that FTT decisions do not set a binding precedent.

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