A recent tax case could pave the way for taxpayers who have been denied a valuable tax relief to claim refunds. But you should treat Gerald and Sarah Lee’s private residence relief (PRR) victory over HMRC with a note of caution as there could be changes to the law ahead.

Summary of the HMRC v Gerald and Sarah Lee tax appeal

The Upper Tribunal has thrown out an appeal by HMRC against an earlier ruling that Mr and Mrs Lee were entitled to full PRR on the sale of the house they’d built on land they bought several years before moving in.

The judges in the latest case backed the taxpayers’ view that the ‘period of ownership’ referred to the length of ownership of the new house – and not the plot of land it was built on.

The decision means Mr and Mrs Lee are eligible for full PRR on the sale of their home.

Background to the case

Mr and Mrs Lee bought a plot of land in October 2010 for around £1.7 million. They demolished the existing house and built a new house, which they then lived in from March 2013.

The Lees claimed private residence relief on the gain that arose when they later sold the plot in May 2014 for around £6 million, exempting them from paying capital gains tax (CGT) at a rate of 28%. They claimed for PRR under the condition the house had been their only or main residence throughout their period of ownership.

But HMRC took the view that PRR was only available for part of the Lees’ gain because they didn’t occupy the land for the full period of ownership (from October 2010 to May 2014).

HMRC went on to issue a ‘closure notice’ to Mr and Mrs Lee after deciding a chargeable gain of around £540,000 (after annual exemption) had been omitted from their self-assessment tax returns.

The Lees appealed this decision to the First-tier Tax Tribunal (FTT), which then backed the couple. The FTT agreed with the taxpayers’ analysis they were entitled to PRR for all the capital gain.

In response, HMRC appealed the FTT’s ruling to the Upper Tribunal.

The Upper Tribunal’s decision

HMRC’s case on appeal was that the FTT, for a number of reasons, made a mistake in deciding the period of ownership referred to ownership of the new house and not the plot of land.

HMRC also argued the taxpayers’ interpretation was inconsistent with case law, in particular that the FTT misconstrued the Court of Appeal’s decision in Higgins v HMRC [2019] EWCA Civ 1860. But the Upper Tribunal rejected HMRC’s submission the FTT erred in its treatment of the case law.

In conclusion, the Upper Tribunal dismissed HMRC’s appeal and backed the Lees.

And following the ruling, HMRC has said it won’t appeal the decision and that it plans to update its guidance.

Our reaction

Private residence relief is a notoriously complex area of taxation. However, it’s also a very valuable relief available to taxpayers.

The HMRC v Gerald and Sarah Lee case is an important win for the taxpayer, and it will be interesting to see if any changes are made to the law.

In the meantime, anyone who has been denied PRR with a similar fact base to this case could consider whether there are any opportunities to mitigate their resulting tax liability. This will depend on the timing of the transaction, but it would certainly be worth revisiting the position.

However, this window of opportunity might be short lived, as HMRC has announced it doesn’t plan to appeal. And that means it either accepts the outcome, or more likely, already has changes to the legislation in mind.

Time will tell which one it is.

Help with PRR

If you’d like professional advice on claiming private residence relief, call our team today on 07813 434195 or email stephanie.churchill@churchilltaxation.co.uk

We can also help you with HMRC tax enquiries and investigations, and we offer a tax expert witness service for solicitors and forensic accountants.

Steph Churchill

Stephanie Churchill

Managing director & co-owner of Churchill Taxation