Capital Gains Tax or CGT is a tax on any chargeable gains made on the disposal of capital assets. However, there is a well known relief that applies on the sale of your main home known as the principal private residence (PPR) relief. The relief is reduced pro rata if you did not occupy the property as your main residence for the whole of your period of ownership. A recent case highlighted how this relief applies to the sale of a property that was originally purchased off-plan.
Mr Higgins exchanged contracts on 2nd October 2006 on an apartment in a new development. The works had not yet started, the apartment was identified on plans but did not yet actually exist. Mr Higgins was to be granted a 125 year lease by the developer) on completion in the form annexed to the contract. The development was delayed by the credit crunch in 2008 and so completion did not actually take place until 5th January 2010. The purchase price was £575,000. Mr Higgins occupied the apartment as his main residence until he later sold it on 5th January 2012 and the sale price was £1,215,000. The apartment had increased in value but Mr Higgins claimed full relief from CGT on the basis that the apartment was his main residence throughout his period of ownership.
NO NO, SAYS HMRC
HMRC disagreed and issued a closure notice assessing Mr Higgins to capital gains tax of £61,383. The First Tier Tribunal held that Mr Higgins was entitled to full relief but HMRC subsequently won on appeal to the Upper Tribunal. The case centred on the technical meaning of “period of ownership” in the relevant tax legislation. There was no previous case dealing with this specific point in this context, even though PPR was introduced back in 1965. The Upper Tribunal decided that Mr Higgins’ period of ownership was the period between exchange of contracts for his original purchase and exchange of contracts for the subsequent sale.
If you buy a property off-plan as your main residence you need to be aware of the CGT implications…
Given the long gap between exchange and completion (2006 to 2010), this meant that Mr Higgins had owned his property for much longer than had actually lived in it. Indeed, he could not have lived in it between 2006 and 2009 because the building works had not been completed. On a technical reading of the legislation, this meant that Mr Higgins could not claim full relief from CGT but was only entitled to partial relief. The gain was assessed over the full period of his ownership (which dated back to exchange of contracts in 2006) but surprisingly the relief was only available in respect of the period where he actually occupied the property as his main residence, i.e. once it was built. It was established as a fact that Mr Higgins did not have another main residence during the building period (for example he had lived with his parents for some of the time and travelled for some of the time).
FACTS AND FOIBLES
The facts can be contrasted with the scenario where you buy land and then build a house on it or carry out alterations or redecoration to an existing house before moving in. In those circumstances HMRC does class the period prior to occupation as a period of main residence for up to 1 year (or 2 years in special circumstances). The Upper Tribunal referred to this extra-statutory concession (known as D49) but stated that it had no bearing on the Higgins case where there was a delay between exchange and completion.
The analysis also raises a point applicable to the majority of house purchases where it is standard to have a short delay between exchange and completion. Does this mean that HMRC must shave a few weeks off PPR in almost every house sale (few purchasers actually occupy from exchange)? The Higgins case states that HMRC’s practice is to ignore this short period between exchange and completion. However, this leaves uncertainty as to exactly what length of delay between exchange and completion will be acceptable to HMRC. If you buy a property off-plan and intend to occupy it as your main residence then you need to be aware of the CGT implications for the period when you cannot occupy as the property is still being built. If you are planning to purchase an off-plan property with your spouse or civil partner then you may be able to structure your purchase so as to avoid the CGT problem faced by Mr Higgins, depending upon the facts.