In general, no capital gains tax (CGT) is payable when you sell your main residence. This is due to principal private residence relief (PPR). However, the First-Tier tax tribunal recently upheld a decision by HMRC that Mr Gibson was not eligible for PPR on the sale of a new house, built on the site of his previous residence (now demolished).
Mr Gibson bought the house in 2003, with the intention of renovating it and living there with his girlfriend. He moved in. He was advised by his architect that it would be cheaper to demolish the existing house and rebuild, rather than renovate and so the house was demolished. By 2006 the new house had been completed, but in the interim Mr Gibson found it increasingly hard to finance the works and decided to sell the new house as soon as it was finished. Mr Gibson moved into the partially completed house for a few months prior to its sale (although the house was at that stage barely habitable).
The tribunal decided that:
- The new house and the demolished house were not the same dwelling for the purposes of PPR. This meant that Mr Gibson’s occupation of the old house was not considered relevant when deciding whether principal private residence relief should apply to gains on sale of the replacement house.
- His occupation of the replacement house was insufficient to make the new house his residence, as he was just camping at the house without intending to live there permanently.
- Mr Gibson was denied PPR because he had not established that the house was his main residence.
While this decision is unsatisfactory in some respects (and depends on its particular facts) it serves as a warning that HMRC will challenge a claim for principal private residence relief where they believe a house has been bought, rebuilt and sold for a quick profit.
In the South East the value of a plot can be much higher than the value of the house standing on it and it is not uncommon for a small or run-down house to be demolished and replaced by a much larger home. To avoid the same fate as Mr Gibson, it is important to demonstrate an intention to treat the new house as a permanent home and to obtain professional advice before embarking on a quick sale.
If you have any queries with regard to this matter, please contact any member of our Tax, Trusts and Estates team: