The case centred around the issue of ‘period of ownership’ and how this was interpreted by HMRC and the appellants. HMRC appealed to the Upper Tribunal following a lower tribunal decision from 2022 that ruled that the couple’s calculation for principal private residence relief was correct.

The tax dispute relates to the purchases of a plot of land for £1,679,000 by Mr and Mrs Lee on 26 October 2010. They demolished the existing house and built a new house which they then lived in from 19 March 2013 until the property was sold in May 2014.

The Lees claimed principal private residence relief (PRR) on the gain which arose when they sold the plot on 22 May 2014 under s223(1) Taxation of the Chargeable Gains Act 1992 (TCGA 1992). Section 233(1) stated that no gain was chargeable ‘if the dwelling-house…has been the individual’s only or main residence throughout the period of ownership…’. They considered all of the gain accruing from 26 October 2010 to 22 May 2014 was eligible for PRR.

On 29 January 2016, the appellants submitted their self assessment tax returns for the year ended 5 April 2015.

HMRC opened enquiries into the appellants’ tax returns in January 2017 under section 9A TMA 1970. From January 2017 to June 2019, correspondence between the HMRC, the Lees and their representative, Gabelle LLP, considered whether the purchase, redevelopment, and sale of the property was either a trading or capital transaction, and if the latter, whether extra statutory concession D49 (ESC D49) applied.

In their tax returns, the Lees had claimed private residence relief (PRR) on the gain which arose when they sold the plot on 22 May 2014 under s223(1) Taxation of the Chargeable Gains Act 1992 (TCGA 1992). The law stated that no gain was chargeable ‘if the dwelling-house…has been the individual’s only or main residence throughout the period of ownership…’. They considered all of the gain accruing from 26 October 2010 to 22 May 2014 was eligible for PRR.

HMRC argued that PRR was only available for a proportion of the gain, which it calculated as 18 months out of the 43 months the property was owned for.

Under the apportionment provisions of s223(2) TCGA 1992, that proportion was derived by the fraction calculated by dividing the length of the period of ownership during which the new house was the Lees’ main residence (March 2013 to 22 May 2014) by the longer ‘period of ownership’ of the land (26 October 2010 to 22 May 2014).

The First Tier Tribunal (FTT) allowed the Lees’ appeal against HMRC’s closure notices amending the couple’s self assessments returns and demanded tax of £541,821 due to a chargeable gain.

HMRC appealed the decision at the Upper Tribunal, acknowledging that the term ‘period of ownership’ is not defined but argued that ‘its clear natural meaning, in its statutory context, concerns the ownership of the asset whose sale gives rise to the gain’.

The taxpayers’ barrister Laurent Sykes KC argued that the language of the statute supported the Lees’ case, and that there was no justification in terms of the purpose or scheme of the legislation, the case law, or subsequent legislation, to justify departing from what they maintained was the clear and natural language of the statute.

HMRC stated that if a person buys a leasehold interest in bare land, then later buys the freehold, and builds and moves into the house, the ‘period of ownership’ starts with the leasehold purchase. The Lees’ interpretation was that it would only start with the completion of the house.

According to HMRC 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. 

HMRC also argued that if the taxpayers and the FTT were correct in their interpretation that the ‘period of ownership’ only commenced upon completion of the dwelling house, the qualifying event (the completion of the construction) could never occur as contemplated by s223ZA(1)(d) during the period beginning with the individual’s period of ownership.

If the taxpayers’ interpretation were correct there would, HMRC argued, have been no need for s223ZA (at least for builder/occupiers in the position of the taxpayers) to be enacted.

The Upper Tribunal rejected this argument, stating: ‘The enactment of s223ZA does not have the effect of preferring HMRC’s interpretation. It is, as Mr Sykes pointed out, possible to envisage circumstances where the provision is not redundant on the taxpayers’ interpretation.

‘For instance, the dwelling house could be capable of being completed to a degree that it made sense to talk of it being owned (so as to start the period of ownership) yet some element of the construction could still be outstanding – for instance of an annex – so as to constitute a qualifying event which happened, as envisaged during the period of ownership.’