Off-Plan Tax Trap: PPR Relief & “Period of Ownership”
Principal Private Residence (“PPR”) relief is one of the more widely known tax reliefs and can exempt an individual from capital gains tax (“CGT”) on the sale of their home.
The level of PPR relief available is calculated by reference to the “period of ownership” and the “period of occupation” on a pro rata basis. With this in mind, where an individual has lived in their home as their main residence throughout the period of ownership, then a liability to CGT should not arise on a sale.
In HMRC v Higgins (2018), the Upper Tribunal considered when the period of ownership commenced for an off-plan purchase of an apartment.
The UT reversed the First-Tier Tribunal’s decision and held that the period of ownership started from the date the contract for purchase was signed – even though the property had not yet been built. Unfortunately for the taxpayer, this meant that PPR relief was restricted thereby resulting in a substantial CGT liability.
HMRC v Higgins
- On 2 October 2006, Mr Higgins entered into a contract to purchase an apartment in a development. At that time, the development works had not yet commenced and the apartment was identified on the plans but did not yet exist.
- Due to the credit crunch, the construction work only began in November 2009 and it wasn’t until December 2009 when the apartment was substantially completed. Mr Higgins had no right to access the building until late 2009 when the apartment was under construction.
- Completion took place on 5 January 2010 and Mr Higgins occupied the apartment as his main residence from this date until it was sold.
- Mr Higgins claimed entitlement to full relief from capital gains tax on the basis that the apartment was his main residence throughout his period of ownership. HMRC refused the claim.
It was agreed by both parties that prior to 5 January 2010, the apartment was not Mr Higgins’ main residence for the purposes of PPR relief as the apartment did not yet exist. The issue in point was the date on which the period of ownership commenced.
HMRC relied on the legislation that defines the date of acquisition for CGT purposes as the date the contract is made (TCGA 1992 s. 28). On this basis, the period of ownership started on the date the contract was signed (i.e. 2 October 2006) and therefore PPR relief should be calculated by reference to this date.
Mr Higgins contended that HMRC should take a more realistic view of the facts, and that period of ownership should take its ordinary meeting. It was argued that the relevant period of ownership started when he was first able to occupy the property, i.e. 5 January 2010.
The FTT upheld Mr Higgins’ appeal and concluded that the term period of ownership should be given its ordinary meaning and therefore commence on the date that he had the right to occupy the property and the purchase was both physically and legally completed.
The UT reversed the FTT’s decision and dismissed Mr Higgins’ appeal, holding that the period of ownership for the off-plan purchase commenced when the contract was signed on 2 October 2006.
The legislation defines the date of acquisition and disposal for unconditional contracts as the date the contract is signed, therefore the period of ownership is the period between the dates that contracts are signed.
It was noted that the acquisition cost for the apartment was fixed on 2 October 2006 when the unconditional contracts were exchanged, therefore Mr Higgins enjoyed the benefit of the increase in value of the property during that period.
What does this mean?
In the majority of house purchases there is a delay between the exchange of contracts and completion, with the purchaser only being able to occupy the property from the later date.
With this in mind, PPR relief should strictly be restricted in almost every case when the purchaser subsequently sells the house because it will rarely have been their main residence for the whole period between the exchange on purchase and exchange on sale.
In Higgins, HMRC confirmed that in practice they will ignore “a few weeks’” non-residence that occurs as a result of the delay between the exchange of contracts and completion. Regrettably, HMRC failed to provide a definition of a “a few weeks”, but hopefully this will be clarified in HMRC guidance as a result of this case in the future.