Dream House Tax Nightmare

Sometimes a tax case comes along which underlines the importance of taking good tax advice. This applies also when doing something to your main home, where there is a common assumption that a sale is always tax free.
 
Mr Gibson, bought a property for £715,000 and lived in it. He then decided to demolish the original house and build his 'dream house'. He had worked out that demolishing and rebuilding would be more cost effective than renovating the existing structure. The new house was built on new foundations out ofdifferent materials.
 
Mr Gibson then ran into relationship and financial difficulties and decided to sell the new house for £1.5 million. He assumed that the substantial gain would be tax free, as he believed that Principal Private Residence relief would apply and so he completed his tax return on this basis. HMRC disagreed.
 
The key failure here was that Mr Gibson did not 'properly' live in the new house before he sold it. The complete demolition of the old house, meant that the new house had to be considered separately, they were judged to be different 'dwelling houses' so Mr Gibson's occupation of the first house became irrelevant and his occupation of the second house became critically important.
 
Although Mr Gibson said he had camped at the new property while it was being built, this was not enough to convince the tax tribunal.
 
Mr Gibson's intention to live in the new house was not enough, neither was camping at the property while it was under construction. He failed to show a period of quality residence in the new house which would have led to it being treated as his home. 
 
However unfair this may seem, if only a couple of circumstances had been different about this case then the outcome could have been quite different. Although it is a generous and widely applied relief, PPR can be lost quite easily and sometimes for notquite logical reasons, this is not always appreciated.
 
Mr Gibson not only ended up having to pay capital gains tax on the gain but he also got landed with an onerous 50% penalty for negligence in completing his tax return. Expensive mistake, which could have been avoided.
 
If you are planning anything similar I would recommend that you get good tax advice - so your
dream house does not become a tax nightmare.