Tribunal ruling could result in Capital Gains Tax refunds

A court ruling has opened the door to Capital Gains Tax refunds. In brief, Upper Tribunal judges proved that HMRC had been wrongly interpreting one aspect of the law ever since CGT was introduced in 1965.

CGT and principle private residence relief

To understand the ruling, you need to know a little about Capital Gains Tax and principal private residence relief (PPR).

If you meet the conditions for PPR, you don’t pay CGT when you sell your main home. The conditions are as follows:

• The home is your main home and you’ve lived in it for all the time you’ve owned it
• You’ve not let any part of the home out (this excludes having a lodger)
• You’ve not used any part of the home exclusively for business purposes
• The grounds of your home don’t exceed 5,000 square metres (just over an acre)
• You didn’t buy the home simply to make a gain

If any of these conditions don’t apply, you’ll normally have at least some CGT to pay. You can read about the rules in more detail here. There’s also a helpful online tool that helps you work out what tax relief you’re eligible for when you sell your home.

Capital Gains Tax dispute

To understand the CGT ruling, we need to go back to 2010. In that year, a couple called Gerald and Sarah Lee bought some land for £1.679 million. Between October 2010 and March 2013, they demolished the house that was on the land and built a new one. The couple, who had been renting a property while the new home was built, then moved into the house and it became their primary residence.

In May 2014, the couple sold the home and the land. They claimed PPR as they believed they were entitled to the relief.

Fast forward to January 2017. In that month, HMRC opened an enquiry into the couple’s tax returns. HMRC believed that taxpayers have two years from taking ownership of a property to moving into it. After that period, it believed PPR could not be applied. Crucially, it believed ownership for PPR purposes began when the couple bought the land.

Gerald and Sarah Lee believed that ownership did not begin when the land was bought. Instead they believed it began when the house was ready for habitation. For this reason, they had claimed PPR in full.

The Capital Gains Tax ruling

HMRC believed the couple owed £158,000 in CGT. For this reason, the matter ended up in the courts. A First Tier Tribunal ruled that the ‘period of ownership’ referred to the time the house was owned, not just the land.

HMRC appealed, but an Upper Tier Tribunal upheld the ruling. The decision was based on the language of the Taxation of Chargeable Gains Act 1992.

Do you qualify for Capital Gains Tax refunds?

The tribunal decision effectively demonstrated that HMRC had been interpreting the law incorrectly for almost 60 years.

This could mean that many taxpayers who built their own homes – and faced a subsequent CGT bill – could be due Capital Gains Tax refunds. The Daily Telegraph points out that, since 2016, some 63,662 couples and individuals have registered self-build projects.

Unfortunately, for Gerald and Sarah Lee, the legal process was a long and expensive one. They spent in the region of £100,000 on legal and tax advice, but will get only a small proportion of that sum back from HMRC.

For others in their situation, however, the case may lead to CGT refunds. If you believe you’ve incorrectly been charged or have wrong paid CGT on property, get in touch with one of our specialist accountants today.