‘We fought the taxman and won £158,000 – here’s how’

In the leafy Yorkshire village of Wentworth, Gerald and Sarah Lee spent the best part of three years painstakingly building their dream home.

Little did the couple know that when they finally got to stand back and admire their handiwork a Herculean-style task of even greater proportions still awaited them.

In 2014, the Lees sold the property and made a £540,000 profit. They claimed full Private Residence Relief (PRR), exempting them from paying capital gains tax at a rate of 28pc.

But two years after the sale, they received a letter from HM Revenue and Customs throwing doubt over whether they were in fact entitled to any relief at all.

What followed were demands for everything from credit card statements to proof that half of an unrelated trust that passed to Ms Lees’ brother following the death of her mother was legitimate.

The letter signalled the beginning of a seven-year-long battle with the taxman over a £158,000 bill which the couple, now both 61, eventually won. Accountants say many more homeowners who built their own properties could now also be due refunds.

The dispute hinged on how HMRC applied one of its own rules, which says taxpayers have two years from taking ownership to moving into a property before PRR no longer applies.

The Lees, who were renting while they built their home, were able to prove that ownership begins from when a house is ready to move into, and not from when land is bought – which was HMRC’s interpretation. This meant they were right to claim the relief in full.

Tax experts say the landmark ruling, reinforced by an Upper Tribunal judge after HMRC appealed, proved that the taxman had been wrongly following the law for nearly 60 years.

Accountants now say thousands of taxpayers who built their own homes could be entitled to claim large refunds – and that many could enjoy big future savings when they finally decide to crystallise their assets.

Since 2016, 63,662 individuals and couples have registered self-build projects. In the 2010s – before local councils collected any data on self-builds – around 15,000 self-build homes were being completed annually, according to Joseph Rowntree Foundation estimates.

This followed a big increase in self-builds during the 1990s. Prior to 1990, closer to 2,000 were being built each year.

While the Lees’ triumphant win will have rippling implications nationwide, they said the result did not come without huge costs. The two spent around £100,000 on fees for legal and tax advice, but will only get a small fraction of those back from HMRC.

This is because any actions taken prior to an Upper Tribunal hearing by HMRC are not deemed as “egregious”, the Lees explained. If the two had lost, however, they were told they would have to pay all HMRC’s legal fees.

Ms Lee said: “If we could wind back the clock, would we do it again? Probably not. And that’s totally wrong.”

Mr Lee added: “Our lives have been put on hold. We haven’t bought a house since. [HMRC] has unlimited resources. For them, it’s their job – they can dissociate. For us, this is our life. Our pension.

“Not having a noose around our neck will allow us to finally buy a house in Chichester. We’ve been renting ever since we sold the property.”

HMRC has said it will not appeal the decision again and that it intends to update its guidance. A spokesman added that only a small number of taxpayers will be affected by it.

But Telegraph Money’s Mike Warburton, a former tax director at accountants Grant Thornton, says the taxman is “playing it down” and that there will be “thousands” of potential claims.

Chris Etherington, a partner at tax accountants RSM, agrees. He said: “Some self-build owners will have made major gains, especially during a period of high inflation. Proportionately, there are significant amounts of tax at stake here.

“HMRC will definitely be mindful of future contributions to the Exchequer following this ruling.”

Some experts have, however, warned potential claimants to proceed with caution. Matthew Peto, partner at solicitors Stevens & Bolton, said those who feel they have been unfairly penalised could have to go through an incredibly lengthy and expensive process before they even reach the litigation stage.

In the Lees’ case, they spent three years speaking to tax advisers before deciding to seek legal representation.

Mr Peto said: “The unfortunate fact is that, in many cases, people simply don’t have the time or resources to put up a fight: accepting HMRC’s tax assessment is the only option.

“It’s worth bearing in mind that even where judgments are handed down in the tax tribunals, that doesn’t necessarily mean HMRC will follow the outcome of that judgment in subsequent cases.

“Each case will turn on its facts and there is rarely an “easy win” for the taxpayer. That said, if a persuasive enough argument can be put to HMRC at the outset you might find you get the outcome you want without a day in court.”

Mr Lee added: “I hope this judgment gives people in the future a fairer application of capital gains tax. However it would be good if it was possible to challenge HMRC without having to have deep pockets.”