November 2019 – A Close Call With CGT Private Residence Relief

Author: Mitchells Roberton
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  • The general rule is that if an individual sells something for more than they paid for it then they are liable for capital gains tax (“CGT”) on the gain. There are various rules and exceptions qualifying that general rule and one of the important exceptions is that there is relief from CGT if you make a gain (as one would hope to do) when selling your home. This relief is often referred to as “principal private residence relief” (“PPRR”).
  • The rationale for there being PPRR seems clear enough: if you sell your home at a gain but are then taxed on that gain you may not have enough left over to buy an equivalent new home – particularly in periods when house prices are on the up. Hence the relief.
  • But the relief is hedged with various qualifications so as to try and stop people exploiting it. One of those qualifications is that in order to qualify for full relief from CGT you must have lived in the home you are selling “throughout [your] period of ownership” of that home. If not, the relief is restricted.
  • In the words of the relevant statute (section 223 of the Taxation of Chargeable Gains Act 1992 (“the 1992 Act”)) none of the gain on selling your home is chargeable to CGT:

“if the dwelling-house … has been the individual’s only or main residence throughout the period of ownership …”

  • Although such rules have been in place since 1965 the meaning of the innocent-sounding phrase “period of ownership” has recently been hotly contested through the courts culminating in a Court of Appeal decision on 4th November. The decision is of some importance – particularly in relation to “off-plan” purchases i.e. cases where you buy your home before the developer has finished (or even started) building it.

The bare facts of the case (Desmond Higgins v Revenue & Customs Commrs [2019] EWCA Civ 1860) 

  • Mr Higgins concluded a contract to buy a flat in London “off-plan” in October 2006.
  • Because of the financial crisis in 2008 building was significantly delayed and completion of the purchase didn’t happen until 5th January 2010.
  • Mr Higgins began living in the property on 5th January 2010 but then concluded a contract to sell it on 15th December 2011 – for a significant gain compared with what he’d originally paid for it.
  • That sale was then completed on 5th January 2012.

HMRC’s position 

  • HMRC said that Mr Higgins was not entitled to full PPRR. He would only entitled to full relief if the property had been his “only or main residence throughout [his] period of ownership”.
  • Now Mr Higgins only took up residence of the flat on 5th January 2010. But, said the Revenue, his “period of ownership” of the flat started when he concluded a contract to buy it in October 2006 and HMRC argued there was support for that being their position in another section of the 1992 Act.
  • In any event HMRC said their approach was consistent with the parliamentary intention of restricting relief where a home had not been a main residence throughout the period during which the gain arose.
  • And, in this case, the flat had not been Mr Higgins’ residence “throughout his period of ownership” – because he contracted to buy the flat in 2006 but only took up residence in 2010. So only partial relief was due and he was liable to pay some £60,000 in CGT to HMRC.

Mr Higgins’ position 

  • Mr Higgins said his “period of ownership” only started on 5th January 2010 when completion of his purchase took place and he moved in.
  • So the flat had been his residence throughout his “period of ownership” and he was due full PPRR and owed HMRC nothing.

The see-saw of decisions 

  • Mr Higgins won before the First Tier Tax Tribunal; the Revenue then appealed and they won before the Upper Tax Tribunal; Mr Higgins then appealed and he won before the Court of Appeal.

The Court of Appeal’s main reasons 

  • As noted, the Court of Appeal decided in Mr Higgins’ favour i.e. that he was entitled to full PPRR on the bass that the flat had been his only residence throughout his “period of ownership” – which only began when he completed his purchase of the flat on 5th January 2010. In particular, the Court of Appeal noted that:
  1. If HMRC were right in saying the period of ownership ran from the date on which a contract was made to buy the flat then hardly anyone would qualify for full PPRR because there was almost always a gap of several weeks if not months between concluding a contract to buy a property and actually completing the sale by paying over the price and getting the keys.
  1. The mere fact that someone has concluded a contract to buy a property does not given them “ownership” of the property such as could allow them to occupy or use it – let alone make it their “only or main residence”.

Post script 

Mr Higgins must have been quite determined – and much relieved to be vindicated in the end. The First-Tier Tax Tribunal issued their decision in his favour in March 2017 but it was only this month that the Court of Appeal did the same agreeing, in substance, with much of what the First-Tier Tribunal had said over two years earlier. 

Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Neil Mackenzie: email njm@mitchells-roberton.co.uk

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