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PPRR: Good news for demolition, development and capital gains tax

Posted on 15 September 2022

Destroyed brick wall and excavator. The demolition of the old house on the new white house background

In Lee & Lee v HMRC [2022] UKFTT 175 (TC), Mr and Mrs Lee bought a house with some attached land in October 2010. They demolished it and built a new house, which took almost three years, moving in in March 2013. They sold it in May 2014 for a significant profit, for which they claimed principal private residence relief (PPRR) such that no capital gains tax (CGT) would be payable on the gain on the basis that it had been their main residence throughout their ownership period. HMRC disagreed and denied relief for most of the period October 2010 to March 2013 before Mr and Mrs Lee moved in.

There is a concessionary rule that allows taxpayers to benefit from PPRR:

  • even where there is a delay to moving in due to works being done on the property. However, this concession is limited to 12 months (and exceptionally 24 months); and
  • for the final 18 (now 9) months of ownership, even if the taxpayer did not live in the property during that time.

HMRC argued that the total ownership period was 43 months, but only the last 18 months qualified for PPRR, meaning only 18/43rds of the gain was exempt from CGT, 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 therefore entitled to full PPRR 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 decision is fairly generous and 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 into the new house (even for a short time) and then sells it, this case would suggest that the entire gain could be exempt from CGT. A word of warning though: HMRC may appeal this case and FTT decisions do not set a binding precedent.

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