In a case which raised novel issues of potentially wide importance to homeowners and property developers, a man who decided that total demolition and re-building of his home would be a cheaper option than refurbishment must face up to a swingeing capital gains tax (CGT) liability.
The First-tier Tribunal found by a majority that the old and new houses were entirely different and, although the man had ‘camped’ in the latter during the building work, it had never become his main residence. On that basis he was not entitled to principal private residence relief under the Taxation of Chargeable Gains Act 1992.
The man had bought the house for more than £700,000 and it was not disputed by HM Revenue and Customs (HMRC) that he had intended to live there. However, he formed the view that it made financial sense to demolish and replace the building and borrowed substantial sums to finance the project.
The construction work took longer and was much more expensive than the man had expected and his relationship with his partner was placed under strain. Rising interest rates had also put him under pressure and he had reluctantly sold the new house – which he had hoped would be his ‘dream home' – once it was completed.
He did not record the transaction on his tax return in the belief that it was exempt from CGT. However, HMRC took the contrary view and raised a tax demand in respect of the property’s disposal as well, as charging a penalty which increased the amount of tax due by 50 per cent.
Dismissing the man’s appeal, the Tribunal found that the old and new houses could only be viewed as entirely different properties. Not one brick from the former had been included in the construction of the latter. Despite the man’s evidence that he had camped briefly in the new house before it was completed, he had failed to discharge the burden of proving that it was ever his main residence.
The man’s original wish to make the old house his home was irrelevant, as he had formed the intention to sell the new one well before it was completed. Despite the man’s plea that he genuinely believed that he was not liable to pay CGT on the sale of the new house, the Tribunal found that ignorance of his obligations was no defence and also upheld the 50 per cent penalty.