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.
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  EWCA Civ 1860).
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.
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  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.
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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.
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.
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.
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Jacquelyn Kimber is a tax partner at Newby Castleman LLP in Leicester, where she advises on a range of tax issues affecting individuals and businesses, including offshore matters and trusts. She can be contacted on 0116 254 9262 or by ...