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HMRC internal manual

VAT Construction

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Zero-rating major interest grants in buildings: holiday homes: what ‘principal private residence’ means

A ‘principal private residence’ is a dwelling that would be lived in as a sole or main residence throughout the year. Even if the building can be ‘resided’ in for the whole of the year, zero-rating must be denied if the recipient of the grant (the grantee) is prevented from using it as a ‘principal private residence’.

A dwelling, which, in effect, is a ‘second home’, is not disqualified under this test unless it is not possible to use it as a ‘principal private residence’.

In Loch Tay Highland Lodges Limited (VTD 18785), a condition of the grant was that the dwelling ‘shall be used solely for holiday accommodation and shall not be occupied as the sole or main residence of any occupant’. In dismissing the appeal the Tribunal said:

We consider that there is no material difference between ‘sole or main residence’ and the statutory phrase ‘principal private residence’.

During the hearing the appellant also argued that the Tribunal decision in Livingstone Homes UK Ltd (VTD 16649) should be followed. It was decided there that a condition that limited the grantee to use the dwelling as a ‘holiday dwelling house only and for no other purpose’ did not restrict him from using it as a ‘principal private residence’. But the Tribunal in Loch Tay agreed with us that the Livingstone Homes case was wrongly decided, saying:

In our view, the Tribunal has ignored the word ‘only’ and the phrase ‘for no other purpose’… It does not matter whether use as a holiday house or a principal private residence are compatible. They may be compatible but they are not the same. The only permitted use is as a holiday house. Nothing else.