Off plan: Gain taxable but loss denied

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Two upper tribunal cases concerning properties purchased off plan concluded that a capital loss wasn’t allowable, but a gain was taxable with no PPR relief. How can those rulings be reconciled?

The gain

When a taxpayer disposes of a buy-to-let investment property, any gain made will be fully taxable. However, if the taxpayer lives in the property from the point it was completed to the date of sale, you may expect the entire gain to be covered by the CGT exemption for a main residence (aka principal private residence, PPR) – but you would be wrong.

Ownership and occupation

For the PPR exemption to apply in full the taxpayer must occupy the residence throughout their period of ownership. Where the property was acquired before it was fully completed, the ownership condition will be met but the occupation condition will not.

The upper tribunal case of HMRC v Desmond Higgins has determined that the gain accruing in the period before occupation commenced is taxable, but that the PPR exemption can’t apply to that period.

The facts

Higgins exchanged contracts to buy his flat off plan on 2 October 2006. But he couldn’t take up residence in the flat until 5 January 2010, when the developers released the property, and his purchase contract was completed.

Higgins signed a contract to sell the same flat on 15 December 2011 and completed that contract on 5 January 2012. He occupied the flat for exactly two years from 5 January 2010 to 5 January 2012.

Court decision

The court decided that Higgins’ ownership period ran from 2 October 2006 to 15 December 2015; the dates he signed and exchanged contracts to buy, and later to sell. This is the normal procedure when calculating capital gains: the ownership period starts and finishes on the exchange date of contracts, not on the completion date unless the contract is conditional or it is never completed.

For Higgins, the gain which accrued in the first 39 months of his ownership to 5 January 2010 could not be covered by the PPR exemption, as he was not in occupation during that period. As HMRC assumes a gain accrues on an even basis throughout the ownership period, Higgins was exposed to a gain of £61,383.

ESC D49

Could Higgins have been helped by the CGT concession D49, which allows a delay in taking up residence to be treated as a period of deemed occupation? The recent FTT case of Mr and Mrs McHugh (TC06605) concluded that although ESC D49 refers to a period of up to two years covering a delay in taking occupation, where the delay is longer than two years, ESC D49 can cover up to two years of that delay.  

However, the upper tribunal judge in Higgins said ESC D49 could not be used to cover a delay between the exchange and completion of contracts.

The loss

If the taxpayer sells a property they purchased off plan and makes a loss, surely that loss should be available to set against other gains? Not necessarily.

Uncompleted contract  

If a contract is not completed, the asset is never purchased. If there is no purchase of an asset, there can be no subsequent disposal, and without a disposal there is neither a capital loss or a gain for CGT purposes. This what the upper tribunal decided in Anthony Hardy v HMRC in 2015.

Lost deposit

On 7 May 2008, Hardy exchanged contracts to buy leasehold property off plan, paying the 10% deposit required to be paid on that date, which amounted to £72,000. Possibly due to the intervening credit crash, Hardy could not raise the rest of the purchase price when it became due. As a consequence, the vendor rescinded the contract and Hardy lost his deposit.

Hardy claimed his £72,000 loss as a capital loss and set it against capital gains he had made on other properties. HMRC rejected that loss claim. As Hardy had not completed the contract he hadn’t purchased the property, and he thus couldn’t dispose of it to make a capital loss. The FTT and upper tribunal agreed with HMRC.

Disposal of a right

During the upper tribunal hearing, Hardy argued that he had acquired a right under the contract, and that right was lost when the contract was rescinded, creating a capital loss, the value of which was the deposit he paid.

The upper tribunal judge rejected this alternative argument. He concluded that Hardy lost any rights he had under the contract by failing to comply with his own obligation to pay the balance of the purchase price. Hardy had abandoned the contract, so under TCGA 1992, s 144 (4)& (7) the loss he made could not be a capital loss.

*8 October 2018: This article was edited to amend a term (see comments below)*

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

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05th Oct 2018 14:23

I must say Aweb has done really well this week in covering some interesting recent cases. Well done!

Thanks (4)
to Justin Bryant
05th Oct 2018 14:52

We aim to please, Justin.

Just a point of order, I have changed the picture for this article. As Rebecca sagely pointed out, one would have to have been born in about 1830 to buy the building in the original photo off plan!

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By CTA
06th Oct 2018 09:47

Principal not principle (private residence).

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to CTA
08th Oct 2018 09:03

Thanks CTA. That's amended now.

Thanks (1)
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08th Oct 2018 11:56

Extract above
'Higgins was exposed to a gain of £61,383.'

Poor old Higgins, mind you he does seem to have been un-lucky. Very hard to feel sorry for people who make a killing selling properties.
Mind you it just goes to show you scratch the surface and the HMRC have rules, rules and more rules, very easy to overlook a rule or two and walk onto something nasty.

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08th Oct 2018 12:07

Both these decisions are pretty harsh. In the first instance he bought a property and moved into it as soon as completed and sold two years later. Perhaps he would have been better served by arguing that as a fact the property gain did not accrue throughout the period but only started when the property was habitable?

In the second case, the person has clearly lost £72,000. Perhaps a better worded contract might have helped, but this case just proves the rules are stupid and HMRC even more so for seeking to apply them so rigorously.

In both cases a better view of intent would result in much fairer results- taxpayers reading these cases are hardly going to be re assured that HMRC only tax 'the right amount'.

Sounds more like 'the maximum amount' to me.

Thanks (5)
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to Ian McTernan CTA
08th Oct 2018 13:28

Yes, that is quite a good point potentially as the gain can I think be apportioned on a just & reasonable basis rather than simple time apportionment (I think the legislation is silent on that aspect as in this other case https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65240).

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to Justin Bryant
09th Oct 2018 18:09

Michael Thomas QC acting for the respondent tried that but the tribunal decided that s224 had no application to the facts of the case under discussion and should be applied only in circumstances where there is a change in what is occupied as the main residence, following a period of occupation.

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to Ian McTernan CTA
08th Oct 2018 13:14

Ian McTernan CTA wrote:

In both cases a better view of intent would result in much fairer results- taxpayers reading these cases are hardly going to be re assured that HMRC only tax 'the right amount'.

Sounds more like 'the maximum amount' to me.

Given that HMRC have removed references to collect the correct amount of tax due from their mission statement, and have included to maximise the take, is it any surprise?

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to Ian McTernan CTA
09th Oct 2018 18:01

"Perhaps he would have been better served by arguing that as a fact the property gain did not accrue throughout the period but only started when the property was habitable?"

That is exactly what Michael Thomas QC acting for the respondent argued and the tribunal rejected the argument. The upper tribunal decision notes that (a) TCGA 1992 taxes gains arising on the increase in value between the date an asset is acquired and the date it is disposed of (b) S28 notes that the date of acquisition and disposal are determined by the dates upon which contracts are exchanged and not the date the contracts are completed, and (c) gains are assumed to accrue ion a straight line basis throughout the period of ownership of the asset, and (d) s223 provides for partial relief where an asset has been used as a private residence for only party of the period for which the asset has been owned.

There is nothing surprising therefore about the decision. The only surprise is that the first tier tribunal came to a different decision.

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08th Oct 2018 19:57

So if I was a self-builder and I buy a plot of land. I live in a caravan on site for say 2 years and build a house. I move in 2 years after I bought the land. Does that mean I have a capital gain to pay on the difference between the current value and the land cost (perhaps the build cost comes into play as well)? I owned it, but did not occupy it.
Is there a definition of occupying?

Similar position with a run down property, does the same apply?

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