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CGT: PPR relief restored for off-plan purchases

The Court of Appeal has concluded that the gain made from a home bought off-plan can be covered in full by principal private residence relief, even if there was a delay in moving into the property.

29th Nov 2019
Tax Partner Newby Castleman LLP
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A delay between exchanging contracts and completion is a common feature of a property purchase and can vary between a few days to a couple of months. Would most homebuyers (and their tax advisers) expect that delay to prejudice a claim for private residence relief on a future sale? Certainly not.

However, that is the situation in which Desmond Higgins found himself when he claimed principal private residence (PPR) relief following the sale of his main residence (Higgins v HMRC Commissioners [2019] EWCA Civ 1860).

Background

On 2 October 2006, Higgins entered into a contract to purchase a leasehold apartment off-plan in the former St Pancras Station Hotel and paid a substantial deposit. At the time the contract was signed, the apartment had not been constructed and was no more than “a space in a tower”.

Development work eventually commenced in November 2009 and the purchase was completed on 5 January 2010, prior to which date Higgins had no right to occupy the property. He lived in the apartment as his main residence from 5 January 2010 until its sale on 5 January 2012. Higgins claimed PPR relief on the gain arising on the disposal.

Private residence relief

This CGT relief applies to a gain arising on the disposal of a property which is or has been an individual’s only or main residence at any time during the period of ownership. Where the property is not the individual’s main residence throughout the period of ownership (ignoring the final 18 months of ownership), PPR relief is reduced proportionately (TCGA 1992 ss 222, 223). The “period of ownership” is not defined in the legislation.

Tribunal decisions

The first tier tribunal (FTT) considered Higgins’s period of ownership began when he acquired the legal right to occupy the apartment, ie on completion on 5 January 2010. Thus, PPR was available for Higgins’s entire period of ownership and covered the entire gain.

The FTT held it would be perverse in the context of providing CGT relief to individuals for the period of ownership to commence before the purchaser had the right to occupy a property, and it would also be contrary to the ordinary meaning of the phrase “period of ownership”. Tax advisers breathed a sigh of relief at having the position confirmed in such a comprehensive manner.

That relief was short-lived. The upper tribunal (UT) disagreed with the FTT and found that Higgins’s period of ownership commenced on 2 October 2006 when he exchanged contracts for the purchase of the apartment, in accordance with the usual rule for determining the time of acquisition and disposal under TCGA 1992 s 28.

In a surprising decision, the UT held that Higgins had an equitable interest in the apartment from 2 October 2006, despite it being no more than empty space until development commenced in November 2009. Higgins’s entitlement to PPR relief was therefore restricted (HMRC v Higgins [2018] UKUT 280).

Court of Appeal

HMRC contended that “period of ownership” should be given its ordinary meaning by reference to the period between acquisition and disposal. That period was determined by TCGA 1992 s 28, and therefore Higgins’s period of ownership commenced on 2 October 2006 and ended on 11 December 2011 (the date of exchange of the contract for sale).

There was no requirement that ownership should be legal rather than equitable, and Higgins had an equitable interest in the apartment from the date of exchange; that is, he could sue for specific performance of the contract. Otherwise, HMRC argued, an individual could benefit from PPR in respect of more than one property at the same time.

On this analysis, very few taxpayers would ever fully benefit from PPR in respect of gains realised on the disposal of their main residence, owing to their frequently being a delay between exchange and completion.

HMRC felt this was a reasonable position as:

  • calculations of the proportion of the gain chargeable could be performed using months, rather than days or weeks;
  • any resultant gain would probably be within the individual’s annual CGT exemption;
  • it was not HMRC’s practice to select cases for enquiry where a delay between exchange and completion created a small CGT liability. 

Decision

In a unanimous judgment, the Court of Appeal gave these arguments short shrift: there is nothing in the tax law to suggest that taxpayers should be excused from relatively small liabilities to CGT. Also, it is inconceivable that Parliament did not intend PPR to provide full relief in the normal case of a taxpayer’s acquisition of an only or main residence.

Furthermore, there was nothing in the PPR legislation which referred to TCAG 1992 s 28. The court saw no reason why the period of ownership for PPR purposes must run from the date of the contract under which it was bought as s 28 is, it considered, a deeming provision ‘the applicability of which must be assessed in the specific context’.

Finally, construing the period of ownership as commencing on the date contracts are exchanged did not sit comfortably with the ordinary meaning of those words, and would deny full CGT relief in a large number of cases.

Conclusion

Whilst common sense suggests this is the right result, it will be interesting to see whether HMRC seeks to take this case further or simply amends the legislation to give their interpretation statutory effect.  Watch this space.

Replies (7)

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By Justin Bryant
29th Nov 2019 13:37

There was (rightly) a lot of criticism of the UT judge's decision on this website so it's a bit surprising to learn she was an experienced tax judge. See:
https://www.accountingweb.co.uk/any-answers/youve-been-doing-your-ppr-cg...

https://www.accountingweb.co.uk/any-answers/another-amazing-fnapn-taxpay...

The CoA judgment is clearly a correct one.

Thanks (5)
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By Ian McTernan CTA
02nd Dec 2019 11:01

Finally get the right decision 7 years after the sale.

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By coolmanwithbeard
03rd Dec 2019 07:27

This seems like the correct decision from a common sense point of view. The nonsense about not chasing small amounts or covered by annual allowance do not reflect a common sense or sustainable approach. It is likely in some circumstances that a move like this may be funded by a sale of something that CGT is due on in the same year and that someone should get the relief on that.

I suspect that if it had been sold before it was completed then CGT would be due on any profit

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By whitevanman
03rd Dec 2019 10:19

I'm not sure the decision is "correct".
As the article concludes, "common sense" may suggest it is the right result, but what has that got to do with it?
The court resorted to what it considered parliament intended, despite the words in the act being fairly clear and unambiguous, it simply didn't fit what they regarded as the paradigm case.
Also, I found the comments about s28 at best strained. Is it a deeming provision? Arguably it is simply a tie-breaker and I think that is where the problem arises..
UK property law is concerned with interests in land and not buildings. CGT broadly follows that but, when it comes to a relief for a PPR parliament resorted to discussion of dwellings etc. It's OK to talk about residence and such but, in law, you don't buy/sell the building and as this case and others show, one often acquires an interest in land before a building exists.
It is fine to interpret the legislation so as to fit the case but it does nothing for clarity.
The article also suggests HMRC might seek to have the legislation changed to reflect their (apparent) interpretation. It would probably be better to make it clear that for the purposes of s222 relief would extend to cover not only the periods of actual occupation but also short periods between exchange and completion. But that would leave cases such as the current one, with a tax charge. Writing legislation to fit all possible cases where we might think relief should be given may prove rather more difficult.
I would guess that, unless they see this as being ( potentially) a much wider problem, hmrc may choose to accept the decision since it produces the "right" result and resolves any difficulties for the time being. If a more significant case arises, it could be taken to the SC. But we will see.

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Replying to whitevanman:
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By Justin Bryant
03rd Dec 2019 12:56

Common sense had got a lot to do with it as courts are obliged to interpret legislation so as to avoid nonsense results, as is potentially the case here.

Furthermore (although not needed to be deployed for this decision), under Marshall v Kerr tax deeming rules are usually interpreted narrowly so that they do not produce nonsense results.

Also, I've just heard that HMRC will NOT be appealing to The Supreme Court, so the CoA decision is final.

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Replying to Justin Bryant:
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By whitevanman
03rd Dec 2019 13:23

Agreed but the "nonsense" result arises, not because of s28 (and as I say, it seems odd to call it a deeming provision anyway) but because of the interaction between it and s222 etc. They couldn't simply disapply s28 because that would cause more problems and if one sought a legislative change it would have to be more imaginative (and complex).
It is no surprise HMRC are not (apparently) appealing but that leaves what is at best a bit of a fudge by the CoA. I assume the hmrc reasoning will be that the decision referred only to cases involving s222 and the potential "nonsense" result and as I said, IF a more significant issue arises (and that seems doubtful just now), I would not be surprised to see it taken further.

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Replying to whitevanman:
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By Justin Bryant
03rd Dec 2019 14:49

There is no fudge whatsoever by CoA. It's an eminently sensible & correct decision and per my comments in the link below HMRC's counsel's submissions to the contrary were laughable and the UT's judgment was garbage.

https://www.accountingweb.co.uk/any-answers/higgins-wins-in-coa

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