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?
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.
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.
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.
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.
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.
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.
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.