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December 13, 2013
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Demolition of a home - Private Residence Relief CGT

The recent case of Paul Gibson v HMRC (TC03021) provides some interesting points in relation to capital gains tax and Private Residence Relief.

Brief Facts

Mr Gibson bought a property called Moles House, which he lived in as his main residence.

Through a number of convoluted arrangements with a friend, and his then girlfriend's  parents, Mr Gibson decided to demolish the house and build a new one on the plot. After the plumbing had gone in on the new house he was described as living there in a "camping" existence. Soon afterwards financial difficulties meant the house was sold, overall for a gain.

The gain was not declared on his tax return, as Mr Gibson believed he had sold his main residence.

The tribunal was asked whether Private Residence Relief should apply to exempt the gain and if it didn't should HMRC's penalty determination of 50% of the tax at stake be upheld.

First Tier Tribunal Findings

After deliberation between the parties and the Tribunal, the application of Private Residence Relief came down to whether the new house was the same house as the old one, for these purposes.

As an individual, the Tribunal Judge held that the legislation (TCGA s222) referred to a "dwelling house".  Under the plain meaning of term, the Tribunal felt that the new house was a different "dwelling house" to the original house.  As Mr Gibson had never lived with a permanent intention of continuing residence in the new house, he was not entitled to Private Residence Relief on the disposal for capital gains tax purposes.

The layman tribunal member found in contrary to the Tribunal Judge (he believed that the new house was the same asset for these purposes).  However, in the case of a tie, the Tribunal Judge's decision is decides he outcome of the case. Therefore the case was decided in favour of HMRC with no Private Residence Relief available.

Interestingly, the hearing found that there was no relevant ruling precedent on this point and as this case was heard at the First Tier Tribunal this outcome is also not binding on future hearings; but it is of course of significant interest.

The Tribunal upheld the penalty rate of 50% of the tax at stake.  A review of the case content reveals that ultimately the appellant made very little technical argument for mitigation of penalties.  As a result the Tribunal only identified ignorance as a reason for the non-declaration on his tax return, hence the penalty was confirmed.

News & Views from PD Tax - December 2013

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