R & C Commissioners v Lee and Another
Jurisdiction | UK Non-devolved |
Judgment Date | 29 September 2023 |
Neutral Citation | [2023] UKUT 242 (TCC) |
Court | Upper Tribunal (Tax and Chancery Chamber) |
[2023] UKUT 242 (TCC)
Judge Swami Raghavan, Judge Nicholas Aleksander
Upper Tribunal (Tax and Chancery Chamber)
CGT – Private residence relief – TCGA 1992, s. 222 – Taxpayers bought land, demolished existing house and built new dwelling-house which they lived in as main residence then sold for gain – Meaning of ‘period of ownership’ used in apportionment relief – TCGA 1992, s. 223(1) – Held – Ownership referred to that of new house as opposed to land as HMRC argued – HMRC’s appeal against FTT decision dismissed.
In R & C Commrs v Lee & Anor [2023] BTC 531, the Upper Tribunal dismissed HMRC’s appeal against the First-tier Tribunal decision in Lee, agreeing that the reference to ‘period of ownership’ in the private residence relief legislation referred to the period of ownership of the dwelling-house, not the land on which it stands
The appellants (Mr and Mrs Lee) jointly purchased a freehold interest in land in 2010. The land was redeveloped, the original house being demolished and a new house built, completing in March 2013. Four days after completion, the appellants moved into the new house and occupied it until sale in March 2014, when they claimed full private residence relief.
Before the First-tier Tribunal (FTT), the appellants successfully argued that private residence relief did not have to be apportioned in accordance with TCGA 1992, s. 223(1) because the term ‘period of ownership’ refers to the period of ownership of the dwelling-house not of the single asset (being the land, on which the dwelling-house was situated) that was sold.
Although HMRC raised a number of grounds on which they considered the FTT had erred in reaching their decision, as the Upper Tribunal identified, the key question was whether the FTT’s interpretation of the phrase ‘period of ownership’ was correct. As they also noted, the phrase was not defined in the legislation although used extensively in s. 222 and 223. In their view, as a matter of straightforward textual interpretation and having regard to the immediate surrounding context, they considered that the phrase could only refer to the ownership of the dwelling-house, in particular because the scoping provision in s. 222(1) referred to ‘an interest in ... a dwelling-house’. They therefore had to consider whether there was anything to suggest that (as HMRC contended) the provision should be read differently.
The Upper Tribunal considered all of HMRC’s contentions and reached the following conclusions:
- they did not find HMRC’s argument that a dwelling-house is not capable of being owned separately from the ground on which it stands to be convincing, both because the term dwelling-house would also cover a flat (the title to which rarely includes the ground it stands on) and also because the legislation did not envisage a separate interest in the house and the ground;
- they did not agree that the reference in s. 222(8) (in relation to job-related accommodation) to ‘period of ownership of a dwelling-house’ was in contra-distinction to the reference to ‘period of ownership’ in s. 223(1) as that would require the latter subsection to put forward an alternative definition;
- they did not agree that there was any conflict with s. 222(7) (different interests acquired at different times), as that subsection only applied where different interests in real property (e.g. freehold or leasehold) are acquired;
- they did not agree that, because applying ‘period of ownership’ to the dwelling-house rather than the asset that was being sold ran counter to other provisions (e.g. rollover relief in s. 152), the taxpayers’ argument was undermined, on the basis that the term had to be interpreted in the context of the particular provision to which it was being applied;
- HMRC’s argument that the taxpayers’ interpretation could result in ‘double relief’ (because relief would theoretically be available for another residence occupied as an only or main residence whilst the land was also owned) was dismissed as pushing beyond the limits of statutory interpretation by making assumptions about the nature of the relief not reflected in the legislation;
- they did not agree that the FTT had accepted the taxpayers’ argument that HMRC’s interpretation would result in unfairness (if, for example, the land had not appreciated in value before being built on); rather the FTT had recognised that this was an anomaly that resulted from the legislative provision that stipulated use of time-apportionment rather than separate valuations;
- the taxpayers’ interpretation was not inconsistent with case law (in particular Higgins v R & C Commrs[2019] BTC 29 because the view put forward in that case that period of ownership’ was unlikely to start before the asset in question exists was obiter and not argued before the Court of Appeal). Moreover, the Upper Tribunal disagreed with the Special Commissioner’s decision in Henke(2006) Sp C 550 (that there was ‘only one period of ownership of the single asset consisting of the land and any buildings which may be erected on it during that period’) and found that the FTT were also entitled to depart from that reasoning;
- HMRC’s concern that the taxpayers’ interpretation could make the anti-avoidance provision in s. 224(3) open to abuse should not influence the correct interpretation of the phrase ‘period of ownership’; and
- although legislation subsequently enacted (in this case s. 223ZA: residency delayed by certain events) could be looked at in order to properly construe earlier legislation, this was only relevant where the earlier legislation was ambiguous (which, in this case, it was not) and, moreover, that section was not rendered redundant if the taxpayers’ interpretation were adopted as there would still be circumstances in which it could apply.
HMRC’s appeal was therefore dismissed.
HMRC are clearly concerned that this interpretation of the term ‘period of ownership’ could be open to abuse. For example, a taxpayer who owned a parcel of land that had substantially increased in value could build a dwelling-house on the land and occupy it as a main residence for a period, thereby obtaining full private residence relief. Somewhat bizarrely, they themselves raised the concern that this might not be caught by the anti-avoidance provision in s. 224(3) that targets acquisitions made wholly or mainly with the purpose or realising a gain (on the basis that construction of a dwelling-house might not be covered by the term ‘acquisition’). It remains to be seen whether there will be a further appeal (or possible tightening of the anti-avoidance provision).
Comment by Stephanie Webber, Senior Tax Writer, Croner-i Ltd.
Simon Pritchard, Counsel, instructed by the General Counsel and Solicitor to His Majesty's Revenue and Customs appeared for the appellant
Laurent Sykes KC, instructed by Haines Watts appeared for the respondents
[1] Mr and Mrs Lee bought a plot of land on 26 October 2010, demolishing the existing house, and building a new house which they then lived in from 19 March 2013. They claimed Private Residence Relief (“PRR”) on the gain which arose when they later sold the plot on 22 May 2014 under s223(1) Taxation of the Chargeable Gains Act 1992 (“TCGA 1992”). That provided that no gain was chargeable “if the dwelling-house … has been the individual's only or main residence throughout the period of ownership …”. They thus considered all of the gain accruing from 26 October 2010 to 22 May 2014 was eligible for PRR.
[2] HMRC's position, however, was PRR was only available for a proportion of the gain. Under the apportionment provisions of s223(2) TCGA 1992, that proportion was derived by the fraction calculated by dividing the length of the period of ownership during which the new house was the Lees' main residence (March 2013 to 22 May 2014) by the (in this case longer) “period of ownership” of the land (26 October 2010 to 22 May 2014). In its decision published as Lee[2022] TC 08502 (“the FTT Decision”), the FTT allowed the Lee's appeal against HMRC's closure notices (which had amended the Lees' self-assessments to show a chargeable gain of £541,821). With the permission of the FTT on some grounds, and the UT on the remainder, HMRC now appeal against the FTT Decision.
[3] Although HMRC put their appeal on the basis of eight grounds, the central question at issue is a short one of statutory interpretation and it is convenient to start with the legislation. The PRR provisions concern capital gains tax. Under s1 TCGA, tax is charged on capital gain “accruing to a person on the disposal of assets”. Section 15(2) TCGA provides that “[e]very gain shall, except as otherwise expressly provided, be a chargeable gain”.
[4] Section 222(1) provides:
(1) This section applies to a gain accruing to an individual so far as attributable to the disposal of, or of an interest in
- a dwelling-house or part of a dwelling-house which is, or has at any time in his period of ownership been, his only or main residence, or
- land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area.
[5] Section 223 provides:
(1) No part of a gain to which section 222 applies shall be a chargeable gain if the dwelling-house or part of a dwelling-house has been the individual's only or main residence throughout the period of ownership, or throughout the period of ownership except for all or any part of the last 18 months of that period.
(2) Where subsection (1) above does not apply, a fraction of the gain shall not be a chargeable gain, and that fraction shall be
- the length of the part or parts of the period of ownership during which the dwelling-house or the part of the dwelling-house was the individual's only or main residence, but inclusive of the last 18 months of the period of ownership in any event, divided by
- the length of the period of ownership.
[6] There is...
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...on the point, but we deal with the point to ensure there is no uncertainty. [41] HMRC noted that, in the case of R & C Commrs v Lee[2023] BTC 531 the Upper Tribunal said of the term “period of ownership”: [41] … we find that no uncertainty arises. The legislation does not specify the end of......