We generally take it for granted that when you sell your home you will not be charged capital gains tax (CGT). However, it is not always that simple, as a recent legal ruling has made very clear.
In fact, the court case could open the door to a whole load of back claims from homeowners who may have wrongly overpaid CGT.
You only avoid tax completely when you sell a home if you meet the conditions for so-called principal private residence (PPR) relief throughout your period of ownership.
For example, apart from a nine-month overlap period, you are only given relief for one home at a time. However, if you have two homes, you can elect which will qualify for the relief as long as you do so within two years of buying the second home.
The law setting out the rules for claiming PPR relief runs to 11 pages of detailed legislation, supplemented by over 100 pages of guidance in the HMRC manuals.
Few people apart from accountants and lawyers ever look at the legislation because it is so impenetrable.
Instead they rely on various tax guides and, in particular, the HMRC manuals.
I find these manuals very helpful, but it is important to remember that the manuals are not the law – just what HMRC thinks the law is. Ultimately, it is for the courts to decide.
Principal private residence relief has been available ever since the introduction of CGT in 1965. In that time, you might have expected that any anomalies would have been ironed out – but you would be wrong.
What happens, for example, if there is a delay between buying a house and moving into it? The HMRC manuals explain this here. They say that you can claim PPR relief in full, provided you move in within two years of buying the property.
That should cater for most circ*mstances, but what if the property is in poor condition and needs to be substantially renovated? Perhaps the property needs to be completely demolished?
Alternatively, someone may have bought a building plot with the intention of obtaining planning permission and building a home from scratch. In these circ*mstances, it could take years before you move into your home.
Until recently, the professional advice would probably have followed the HMRC guidance in that the PPR restriction would apply. However, a recent court decision by the Upper Tribunal says that this guidance is wrong.
Gerald and Sarah Lee bought a plot of land in October 2010. They demolished the existing property and built a new one which they moved into in March 2013.
When they sold the property for a profit, in May 2014, they claimed the full PPR exemption.
HMRC disagreed and said that they were only entitled to relief on a time-apportioned basis when they lived in the property between March 2013 and May 2014 out of the total period of ownership which began in October 2010.
It claimed that CGT was therefore due on a gain of £540,000 (that’s a tax bill of around £150,000). The Lees challenged this in court where the key issue was when the “period of ownership” commenced.
Was it when the plot was acquired in 2010, as HMRC claimed, or was it only in March 2013 when the house was completed?
In a detailed ruling, the judges decided that the period of ownership only started when the building was completed.
This decision clarifies how the law should be interpreted, not just now but for all previous years. This could mean that many other homeowners will have been told by tax inspectors to pay CGT that we now know was not due.
The normal time limit for making a tax reclaim is four years from the end of the tax year concerned. However, this can be extended by “extra-statutory concession B41”.
This is where the overpayment of tax has arisen because of an error by the Inland Revenue (pre-2005) or HMRC and the tax man can effectively pay it back even though it is outside of the normal time limits.
A spokesman for HMRC said: “We are disappointed in this decision, however we will not be submitting an appeal. Information on claiming a tax refund and overpayment relief is online here.
“HMRC will always ensure all relevant considerations, including whether extra-statutory concession B41 applies, are taken into account for any overpayment relief claims made late. Further guidance for individuals can be found here.”
You may wonder why we have evolved such convoluted legislation.
Several years ago, I met the head of the team of lawyers responsible for drafting the Finance Bill. I asked him why they drafted the legislation in such a complicated way that even trained professionals struggled to understand.
His reply was that they did not draft the legislation for tax professionals, let alone the taxpaying public, but for the judges. This was on the basis that it is judges who ultimately have to decide what the rules are.
I suppose there is some obscure logic to this and it certainly helps to explain why we have finished up with the longest tax code in the world, beaten in length only by the Indian railway timetable.
And if you think our politicians have a significant role in this legislative process, think again. Few decisions are actually debated on the floor of the House of Commons. It is the select committees that do this.
A former colleague, who subsequently became an MP, was a member of several Treasury select committees. He told me that on many occasions there would be only two people in the room who really understood the detail of what they were debating; the Treasury minister responsible and the Opposition spokesperson.
Yet more evidence as to why we desperately need an overhaul of the whole structure of UK taxation.
Mike Warburtonwas previously a tax director with accountants Grant Thornton andis now retired. His columns should not be taken as advice, or as a personal recommendation, but as a starting point for readers to undertaketheir own further research.
