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Tax case: Concession extended deemed period of occupation

Picture of house being built

7 minute read.

The appellants were entitled to reduce the period of reckonable gain on disposal of their private residence by a 24-month period immediately preceding the appellants taking up residence in the property, based on the tribunal’s decision regarding extra statutory concession (ESC) D49.

The appellants (husband and wife) built themselves a new house between 30 November 2004 and December 2007. They then occupied that house as their principal private residence from December 2007 until 27 September 2010, when the house was sold.

The appellants’ tax returns for the tax year 2010/11 did not contain any entries relating to capital gains tax (CGT). Following enquiries by HM Revenue and Customs (HMRC), discovery assessments were made charging CGT on the property disposal. Each assessment was based on the appellants not being entitled to any private residence relief prior to actually moving into the completed property in December 2007.

Penalties were also assessed on the basis that each appellant misled HMRC by deliberately omitting reference to a capital gain from their tax return. The appellants appealed.

A statutory review had been undertaken by HMRC, which decided that ESC D49 had no application. The concession applied broadly in circumstances including where an individual acquires land on which he has a house built, which he then uses as his only or main residence; the period before the individual uses the house as his only or main residence is treated as a period of occupation (for the purposes of TCGA 1992, s 223(1) and (2)(a)), provided that the period is not more than one year.

If there are good reasons for this period exceeding one year, which are outside the individual’s control, it will be extended up to a maximum of two years. If the individual does not use the house as his only or main residence within the period allowed, no relief will be given for the period before it is so used.

The main issues for the First-tier Tribunal (FTT) were: (1) Whether the HMRC review officer was correct that the appellants could not take any advantage whatsoever of ESC D49; (2) Whether the appellants deliberately omitted taxable gains from their tax returns.

On issue (1), the FTT found HMRC’s proposition that if the house building or renovation period exceeded 24 months (so the taxpayer does not move into the property for more than 24 months after acquiring it) no part of the concessionary period is available to be ‘startling’. The FTT considered the purpose and intent of ESC D49; it was essential that its construction should not lead to a manifestly absurd or unfair result.

The FTT contrasted the example of a person who bought land and built a house on it and moved into it after 364 days (who should be able to discount that period for CGT purposes) with someone who took two days longer to build his house (who would lose the right to discount that entire 366-day period for CGT purposes). The FTT was in no doubt that ESC D49 laid down a ‘not more than’ concessionary period and that the words ‘provided that’ achieved the intended objective.

The FTT concluded that each appellant was entitled to have any gain accruing on the property disposal reckoned after taking advantage of ESC D49. Thus in respect of each appellant’s appeal, the period of reckonable gain was to be reduced by 24 months (i.e. the 24-month period immediately prior to the appellants taking up residence in the property in December 2007).

On Issue (2), HMRC conceded that the omission to declare a capital gain was not deliberate but considered that it was nonetheless careless. However, the FTT was ‘unhesitatingly’ of the view that the mere fact of an omission was not sufficient to allow the conclusion (on the balance of probabilities) that the omission arose by reason of carelessness.

The appellants’ appeal against their CGT assessment was allowed to the above extent, and each appellant’s penalty assessment was quashed.

It is perhaps surprising that the FTT sought to rule on a concession, as opposed to pointing out that the taxpayers should seek judicial review. An appeal by HMRC therefore seems likely.

McHugh and Anor v Revenue and Customs [2018] UKFTT 403 (TC)

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