Tax Tribunal’s capital gains tax decision and self-builders

Does D49 apply to self-built homes?

The exemption from capital gains tax (CGT) that applies when selling your only and main residence is a very valuable one. In common with many other exemptions there are, however, a number of rules governing its applicability, and absences from the property (other than for reasons permitted in the legislation) can adversely affect the amount of relief that can be claimed.

In the case of self-builders there may be a considerable delay between acquiring the land on which to build and then moving into the completed house. In these situations extra-statutory concession D49 provides that the period before the owner begins residence will be treated as a period of occupation provided the delay is not more than one year, or, if there are good reasons for it, not more than two years.

In a recent case heard by the First Tier Tax Tribunal (FTT) the applicability of extra-statutory concession D49 was considered. The FTT concluded that it had been wrongly applied by HMRC, and that the example set out in HMRC’s CGT manual as to its use was “simply wrong”. Given the increase in demand for self-build projects in recent years claims for relief under D49 may rise in the future making this decision of particular interest to prospective self-builders.

A longer than permitted delay

George and Mary McHugh built a new house for themselves between November 2004 and December 2007. They lived in the house from its completion until September 2010 when they sold it. They did not declare the disposal of the property in their tax returns for 2010/2011 resulting in HMRC imposing demands for CGT of over £22,000 on each of them together with penalties of over £11,000 each.

HMRC argued that D49 was not applicable as the concession states that the maximum period of delay in taking up residence that it can cover is two years. In HMRC’s view, because the delay in question in this case was in excess of two years, none of the period before December 2007 was exempt from CGT. In support of this, HMRC cited an example in their CGT manual where the owner of a house purchased in January 2011, renovated the property but did not occupy it until May 2014. The manual stated that the owner would only be able to claim exemption from CGT from May 2014 as the maximum two year period had been exceeded.

The FTT found that the example in the manual was wrong and should not be applied or followed and that it would be “startling” that someone who bought a plot of land, built on it and moved in within 364 days should be able to claim additional exemption under D49, while someone who took two days longer to build their house would lose the ability to claim the exemption for the entire period before moving in.

Consequently, the FTT decided that the period of Mr and Mrs McHugh’s ownership subject to CGT should be reduced by 24 months, HMRC should re-calculate the CGT due and the penalties should be quashed.