Principle Private Residence Relief (yet again!)

Chris Stedman
Senior Partner
December 16, 2022
4 minutes

As the value of land increases, more and more homeowners are becoming involved in projects affecting their residences and gardens in the expectation of achieving a significant gain which can then be sheltered from any tax charge under the principal private residence (PPR) relief rules. However, the legislation setting out this relief, while it caters for straightforward issues that arose 50 years ago, struggles when it comes to more complex projects encountered today. Consider the case of Mr & Mrs Lee which was reported a few months ago.

On 26 October 2010 Gerald and Sarah Lee jointly purchased a plot of land in the UK for a touch under £1.7 million. They then proceeded to demolish the original house and build a new one in its place, which was completed on 15 March 2013. Four days later they took up residence.

In May 2014 - some 14 months later - the couple sold this house for just under £6 million.

On 29 January 2016 Gerald and Sarah submitted their 2014/15 self-assessment tax returns - not that this was with two days to go to the statutory filing date. The property gain was not recorded. Almost a year later HMRC opened formal enquiries into these tax returns and the fun began. At some point HMRC closed the enquiries issuing closure notices in which they determined that both Gerald and Sarah were chargeable on a capital gain of £541,821 and found that these gains had been omitted from their 2014/15 tax returns. Naturally, the taxpayers appealed and the case eventually came before the Frist Tier Tribunal.

The pith of the appeals turned on what was meant by "period of ownership" in the context of principal private residence relief. Did the period of ownership cover:

  1. The 43-month period between the acquisition of the land on which the original house was demolished and the sale of the land with the house that was subsequently built; or
  2. The 14-month period between the date that the newly developed house was completed and its eventual disposal?

Under and Extra-Statutory Concession which was relevant in May 2014 the last 18 months of ownership of a property was automatically exempted provided it had been used as the owner's only or main residence at some point. So HMRC offered an exemption of 18/43 of the gain but no more. They wanted to tax 25/43 of the gain.

Gerald and Sarah said no - in their view no part of the gain was a chargeable gain because it was totally covered by PPR relief.

The Decision

The First Tier Tribunal considered the matter at some length looking at the legislation and relevant case law. It fastened on the fact that the legislation governing PPR relief contained no clear definition of a "period of ownership". It concluded that on a natural reading, "period of ownership" must be the period of ownership of the dwelling house that was sold. They allowed the couple's appeal in full.


This was prima facie win for the taxpayer but it leaves a nasty taste behind. Was the PPR legislation really designed to completely exempt such gains? And why hasn't HMRC appealed the decision? True, an FTT decision is not binding and there would be a limit on how far the case could be used in subsequent disputes.

Certainly clients should not place too much reliance on the outcome. Even if they do go ahead with a similar project they would be well advised to disclose such gains, at least in a narrative box on their tax returns, to avoid any charge of non-disclosure with the added problem of penalties.

But surely is it time the legislation is overhauled and principal private residence relief redefined, clarified, and possible capped. Perhaps work is already underway on this which is why HMRC has been reluctant to go any further with the matter at this stage. Watch this space - and hurry if you are thinking of a project involving your home and/or garden.

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