S222 TCGA 1992 refers to a gain arising to an individual on the disposal of an asset which is “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”. It implies that PPR relates to the dwelling itself and if the dwelling is demolished then PPR cannot be due.
This was paramount in the case of Gibson v HMRC [2013] UKFTT 636 (TC). In February 2003 Paul Gibson purchased a property called Moles House, which HMRC accept was his main residence. In 2004 the house (referred to as ‘Moles House One’) was demolished and then a new house was built (referred to as ‘Moles House Two’) on the same site as was more cost efficient than to extend the property. However, after financial and personal difficulties the new house was sold in early 2006.
The tribunal considered two questions:
(1) Were Moles House One and Moles House Two the same ‘dwelling house’?
The FTT had split opinions on this; On one hand the tribunal concluded that demolition and reconstructed achieves the same as an extension of the original house would have done but was more cost efficient and therefore the two houses should be considered one dwelling. However, the other opinion was the that the words of ‘dwelling house’ refers to the building itself rather than to the land. If one house is demolished and a new house is built in its place, then the new house is not the same ‘dwelling house.’
Mr Gibson’s case was weakened by the fact that the two houses were built out of different materials and the new house was not built on the same foundations; it wasn’t considered to be the same house physically. Perhaps the outcome would have been different if the materials from Moles House One were recycled and used to build Moles House Two.
A key factor was the meaning of ‘dwelling house’, Moles House Two was found to be a different dwelling and Mr Gibson would not to be entitled to Private Residence Relief unless he had resided in the new dwelling.
(2) Did Mr Gibson occupy Moles House Two as his main or principal residence prior to its sale?
Mr Gibson did not occupy Moles House Two as his main or principal residence. The Tribunal found that although he claimed to have moved into the house he was only “camping” and as by this time he had already decided to sell the house once the building work was completed it was not enough to amount to “residence”. It didn’t help by the fact the taxpayer’s received financial assistance from his friend who later received a fee after the disposal. Occupation of a property does not equate to residence unless it becomes a person’s home with a degree of permanence and continuity CG64455.
The above case illustrates that more information will need to be obtained before any reasonable conclusion can be reached. What it is the motive behind this transaction, is it with the view to sell immediately or will the owners permanently occupy as their new home?
The fact that PPR is being queried implies that your clients are considering a sale. Remember that this could be a trading transaction or partly caught by the Transactions in Land regime. Only if none of the sale consideration is chargeable to income tax does CGT apply – s37 TCGA 1992.
If CGT does apply, the new dwelling will not have been occupied for as long as the underlying land has been owned and so some computational apportionment will be required to calculate the part of the gain that would attract PPR. It may be possible to make a claim under s24(3) TCGA 1992, to treat the demolition as a disposal of the entire land and property which would trigger a capital gain based on consideration being the market value of the land. If PPR was available at that time, no chargeable gain would arise. The owners would then potentially be able to benefit from the 24-month moving in period for the new home under s223ZA TCGA 1992.
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