In the last Issue of the Rudge Revenue Review, Issue XXX, we considered situations in which an individual buys a residential property which he demolishes in order to build a better residence in which to live. How does Main Residence Relief apply on a later sale of the property? That depends upon determining the ‘ownership period’. In two cases HMRC has argued that the ownership period begins when the land on which the residences have stood was first acquired by the disponer. It was successful in Henke v. HMRC SPC 550 [2006] but unsuccessful in the recent case of Lee v. HMRC [2022] UKFTT. In these cases, HMRC argued that the result of its construction was that Main Residence Relief on the later sale was restricted and part of the taxpayer’s gain was chargeable to CGT.
In considering the relevant case law in Issue XXX, we concluded that it is unlikely that HMRC’s construction is correct but Samuel Dewes of HW Fisher has written to suggest an argument, to which he had referred in an article for the magazine Tax Adviser, under which, even if it were, the ownership period would begin on the demolition of the original residential property and not when the land on which the original property stood was first acquired by the disponer.
Samuel points out that TCGA 1992 s.24(1) provides that:
‘Subject to the provisions of this Act … the occasion of the entire loss, destruction, dissipation or extinction of an asset shall, for the purposes of this Act, constitute a disposal of the asset whether or not any capital sum by way of compensation or otherwise is received in respect of the destruction, dissipation or extinction of the asset.’
As he acknowledges that, on its own this would not have the result that Samuel suggests because the subject of the later sale would be the land on which the new residence sat and not the residence in some way severed from the land. Samuel goes on to point out, however, that s.24(3) provides that:
‘For the purposes of this section, a building and any permanent or semi-permanent structure in the nature of a building may be regarded as an asset separate from the land on which it is situated, but where a building or structure is so regarded, the person deemed to make the disposal of the building or structure shall be treated as if he had also sold, and immediately reacquired, the site of the building or structure (including in the site any land occupied for purposes ancillary to the use of the building or structure) for a consideration equal to its market value at that time.’
One might argue that, because s,24(3) requires one to look at the original building as if it were an asset separate from the land, when the original building is demolished that asset is destroyed and so its destruction is treated, under s.24(1), as a disposal of it with the result that, on the subsequent sale of the new building, its ownership period, for the purposes of Main Residence Relief, cannot have started before the prior deemed disposal of the original building.
On a literal reading, the argument seems a strong one. Might not the Courts, however, take a more purposive approach to the construction of s.24(1) and decide that, construing ‘destruction’ in the context of the other occasions listed in this section, being ‘the entire loss, … dissipation or extinction of the asset’, the deliberate destruction of an asset by its owner was not the sort of ‘destruction’ which Parliament had in mind in enacting the section?
There is certainly a contradiction between HMRC’s argument in Henke and Lee, which depends upon insisting on the fact that the building is not in fact an asset separate from the land, and applying the deemed provision of s.24(3) treating it as if it were.
Although, therefore, Samuel’s argument in respect of s.24(1) and (3) might, as he acknowledges, be countered by an appeal to a broadly purposive construction, Samuel has certainly provided another potential weapon to be used by a taxpayer in such circumstances.
Finally, we should comment that if s.24(1) did apply to the demolition it would raise all sorts of interesting questions in relation to determining the consideration for the disposal and the acquisition cost of the asset which is its subject which would be a suitable topic for examination in a more extended article.
