fbpx

Grand Design Couple Triumph in Capital Gains Tax Test Case

9th November 2018 By Arman Khosravi

Those who make a profit on the sale of their principal private residence do not have to pay Capital Gains Tax (CGT) on it. However, as a test case concerning a couple who built their own home showed, that apparently simple statement disguises a hinterland of complexity and that is why professional tax advice is a ‘must have’.

It took just over three years for the couple to complete their grand design. They then lived in the house as their principal private residence for about three years before selling it for more than £1.3 million. They did not declare any liability to CGT on their tax returns. HM Revenue and Customs (HMRC) took the view that such a liability did arise in respect of the period during which the house was under construction and that its omission from the tax returns was deliberately misleading. The couple were assessed to owe more than £40,000 in CGT and late payment penalties totalling over £20,000 were imposed.

In ruling on their challenge to that decision, the First-tier Tribunal (FTT) noted an extra-statutory tax concession which applies to those who acquire land on which a house is built that they then use as their principal private residence. The exemption from CGT, however, only applies to building projects that take less than a year to complete, although that period can be extended to two years if there are good reasons for doing so. HMRC argued that, as the new house took three years to finish, the concession did not apply and CGT was payable in respect of the entire period of the construction works.

In upholding the couple’s appeal, however, the FTT found that HMRC’s interpretation of the concession would lead to startling and absurd results. A house building project that took 364 days to complete would be exempt from CGT, whereas another that was finished in 366 days would attract full liability to CGT.

The FTT found that, on a true interpretation of the concession, any gain accruing to the couple in the 24 months prior to them going into occupation fell within the concession and was therefore exempt from CGT. The FTT also concluded that the couple’s failure to declare the relevant CGT liability was not deliberate and was consistent with an innocent mistake.

The penalties were cancelled and the CGT payable reduced accordingly.

Source: Concious

Latest News

High Court Grants Parental Order Despite Previous Adoption

18th April, 2024 By

In law, adopted children are regarded as having been born to their adoptive parents. The Family Division of the High Court recently considered whether that fact precluded a parental order being granted under the Human Fertilisation and Embryology Act 2008 (HFEA) in respect of a child born via surrogacy. A couple who lived in the USA had entered into a surrogacy arrangement with another woman. An adoption order naming the couple as the child's parents had been made by a US court and was automatically recognised under UK law. However,...

Flat Owner Not Liable for Pre-existing Structural Issues

16th April, 2024 By

When building owners carry out works on their property, are they liable for damage to adjoining properties that results from pre-existing structural issues? The Court of Appeal recently provided welcome clarification on that question. The owner of a ground-floor flat wished to extend it by building out into his garden. He served notices on owners of adjoining properties, as required by the Party Wall etc. Act 1996. The works caused the rear wall of two adjoining properties to drop by about 2 mm, which led to internal walls and floor...

Challenge to Will's Validity Rejected by High Court

12th April, 2024 By

The best way to ensure your assets will be distributed as you wish is to have your will professionally drafted by a qualified solicitor. In a recent case, a challenge to the validity of an elderly man's will was dismissed by the High Court. The man had previously made a will in 2011, leaving most of his estate equally to his three children. In 2018, by which time one of his sons had predeceased him, he made a further will, leaving the residue of his estate to his other son...

Defiance of Family Court Orders Will Always End Badly

10th April, 2024 By

Custodial sentences very rarely come into play in the family courts. Where there have been repeated breaches of court orders, however, judges may have little choice but to clamp down. This was illustrated in the High Court during committal proceedings that stemmed from a child custody dispute. The background to the case involved contested proceedings between the father and mother of a young child. These concluded with a court order establishing that the child – a daughter – would live with the mother. Three months later the daughter travelled with...