Private residence relief (“PRR”) was first introduced over 50 years ago and is one of the more widely known tax reliefs, providing relief from capital gains tax ("CGT") on the sale of your home.
That said, there has been contention over the definition of the terms “period of ownership” and “periods of occupation”, both of which are crucial for determining if PRR can be applied.
Last year we wrote a
blog on the case of Higgins v HMRC where the Upper Tribunal held that the period of ownership for PRR purposes starts from the date the contract for purchase was signed, even though the property in question had not yet been built.
Mr Higgins has appealed his case to the Court of Appeal who has now reversed the Upper Tribunal’s decision, concluding that the period of ownership commences at contract completion.
Background
- Higgins put down a deposit and entered into a contract to purchase an apartment in a development in London in 2006. At the time of doing this, the development work hadn’t begun.
- Due to the 2008 financial crisis, the construction work was not completed until January 2010. It was at this point that the contract was complete, and the rest of the money was paid. Higgins subsequently moved into the apartment and used it as his main residence.
- Higgins eventually sold the property two years later at a significant profit. He claimed full PRR on his capital gain.
- HMRC denied his claim for full PRR on the basis that the exchange of contracts (i.e. in 2006) was the start date of the period of ownership according to the legislation and therefore as Higgins had been absent for four years, the period of occupation was not satisfied. The result of this was that Higgins was issued with a capital gains tax bill amounting to £61,383.
First-Tier Tribunal
On appeal to the First-Tier Tribunal, Higgins argued that ownership should take its ordinary meaning and therefore the relevant period of ownership would start when he was first able to occupy the property in January 2010. This date was when the purchase was both physically and legally completed.
The Tribunal agreed with Higgins and cancelled the CGT charge as full PRR was granted. HMRC appealed to the Upper Tribunal.
Upper Tribunal
The
Upper Tribunal upheld HMRC’s appeal as they found that taxable gains are able to accumulate as soon as the contracts are exchanged.
This is because 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 where contracts are signed for acquisition and the date when the property is disposed of.
Higgins then appealed to the Court of Appeal.
Court of Appeal
The Court of Appeal said the central question was the meaning of the words “period of ownership” in the legislation which sets out the conditions for PRR and would thus indicate whether the ownership began at exchange of contract or completion of the contract.
In considering the rules, the court took a purposive approach, stating that if HMRC was correct in asserting that the date of ownership ran from the date of exchange of contracts then few people would be able to claim PPR for the period between exchange of contracts and completion.
The court thought that this could not have been parliament’s intention when drafting the legislation as they wanted this relief to be a wide-ranging relief.
Therefore, Higgins’ appeal was allowed, and the CGT was once again cancelled.
Why is this important?
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. The previous ruling left a question mark over how PRR would apply to this period, however this decision provides some certainty (for now) on whether the relief may be obtained.
It remains to be seen as to whether this case will be appealed to the Supreme Court.
If you need any help in determining your tax position when disposing of property and applying the relevant tax reliefs (including PRR), then please
contact a member of
our team.
Related Articles
Off-Plan Tax Trap: PPR Relief & “Period of Ownership” (25 October 2018)
Ritchie v HMRC – Principle Private Residence Relief Pitfalls (22 June 2017)
Evidence Necessary to Support Private Residence Relief – Alison Clarke v HMRC (22 October 2014)
