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.