In September 2010, Mr and Mrs McHugh sold the home they had built for themselves between November 2004 and December 2007. During the build, the couple lived in another property and HMRC deemed the transaction subject to Capital Gains Tax because the new property had taken longer than two years to build.
In the case of Mr George McHugh and Mrs Mary McHugh v HMRC (2018), a Capital Gains Tax liability applied because the building was not occupied as the couple’s private principal residence throughout the period of ownership – the issue was how much of the gain was applicable.
Mr McHugh was served by HMRC with a bill of £22,483 plus £11,780 Penalty Assessment and a further assessment was served on Mrs McHugh for £22,067, together with a Penalty Assessment of £11,585. The Penalty Assessments applied when HMRC concluded that the couple had deliberately misled them by omitting to reference the capital gain on tax returns.
The couple requested a statutory review of the decisions, which concluded that the principal place of residence exemption from Capital Gains Tax would only apply to the time during which the property had been occupied as their principal place of residence.
A further issue raised was the sale with the house of a number of items and whether these were fixtures and fittings or ‘chattels’ which could be sold separately by the McHughs to their purchasers.
Further Assessments were issued based on the McHughs not being entitled to principal place of residence relief before moving into the property.
An Extra Statutory Concession (known as D49) was available for HMRC to use in the event of a short delay in taking up occupancy, but Mrs Carwardine, on behalf of HMRC, told the court that she was unable to provide a copy of the actual text.
Normally the D49 concession would allow for twelve months’ relief but, under circumstances outside the control of the taxpayer, the period could be extended to 24 months. HMRC deemed 24 months to be the maximum time during which the taxpayer could move into the property after acquiring it but after that period no part of the concession would apply – leading to what the Tribunal Judge, Geraint Jones QC, described as a ‘manifestly absurd or unfair decision’.
The judge gave the example of a build that took 366 days leading to the builder being unable to benefit from the concession, but one that took 364 days being able to benefit. It was this point that tipped the balance in favour of the McHughs, and the proposition was described as ‘startling’.
Mrs Carwardine accepted that Mr and Mrs McHugh had sufficiently good reason to warrant the concessionary period to be extended to 24 months and the final judgement ruled that the guidance example was simply wrong, recommending that it be revised to reflect the objective of the rule.
The judgement stated that the omission of the capital gain on each person’s tax return could be treated as carelessness or negligence, rather than a deliberate act for the intention of a crime.
Regarding the chattels sold with the house, which comprised blinds, curtains, carpets and bedroom furniture, the court was told that the price paid by the purchaser of £1,350,000 included the agreed price of the chattels. The McHughs had shared the details of the chattels with HMRC. The price agreed between seller and buyer was £18,816 (at or around the price paid for them) and this was the sum used for the capital gains calculation. However, HMRC deemed that because the goods were second hand they should be reduced in value by 50%. The court agreed that this decision was ‘arbitrary’ and that the price agreed between the parties should be as they saw fit, whether too high or low, as it did not present an obvious ‘tax wheeze’.
All penalties were quashed and the value of the chattels allowed in full.
When buying property built by a DIY self-builder, make sure your investment is a good one. Your local Royal Institution of Chartered Surveyors registered Chartered Surveyor will provide you with an independent home survey, building survey or property valuation in England or Wales.
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