Private Residence Relief: When HMRC’s Arguments Were Off Target!

Mark McLaughlin looks at a private residence relief case involving an individual’s delay moving into a dwelling whilst it was being built.

The extent to which capital gains tax (CGT) principal private residence (PPR) relief is available on the disposal of an individual’s only or main residence is straightforward to establish in most cases. However, differences in interpreting the relief and its scope can sometimes cause disputes between HM Revenue and Customs (HMRC) and the former property owner. 

For PPR relief purposes, a gain on the disposal of a dwelling house is not a chargeable gain if the property was the individual’s only or main residence throughout the period of ownership (or throughout that period except for all or any part of the last 18 months) (TCGA 1992, s 223(1)).

HMRC generally treats the period of ownership as commencing when the contract to acquire the property is made (and not, if different, when the property is conveyed or transferred) (TCGA 1992, s 28(1)). 

When an individual buys a property to occupy as his or her PPR, there might be a time gap between acquiring the property and moving in. In practice, HMRC will often treat short delays in occupation as a period of ownership for relief purposes. Furthermore, in certain circumstances HMRC will, by concession, apply similar treatment to delays of up to one year, or exceptionally up to a maximum of two years (see below). 

However, what if the individual is buying the property ‘off-plan’ (i.e. broadly before it has been built) and there is a more significant delay (e.g. three years) between entering into the contract and eventually moving into the property? HMRC’s approach has generally been that PPR relief is not available in respect of that time period. However, in Higgins v Revenue and Customs [2017] UKFTT 236 (TC) the First-tier Tribunal had other ideas. 

In Higgins, on 2 October 2006 the appellant entered into a contract to lease an apartment. The apartment had not yet been built; the area which was to become the apartment was a space in the former St Pancras Station Hotel. The apartment was substantially physically completed in December 2009. The appellant had no right to occupy the dwelling until 5 January 2010, when he completed the purchase. He occupied the apartment as his PPR from 5 January 2010. Subsequently, the appellant entered into a contract for sale of the apartment on 15 December 2011, and its sale was completed on 5 January 2012. 

HMRC assessed CGT on the gain from the disposal of the apartment. HMRC considered that the time of disposal and acquisition was determined (under s 28(1)) by the date of the contract. Accordingly, HMRC regarded the appellant’s period of ownership as beginning on 2 October 2006 (not 5 January 2010) and ending on 15 December 2011 (not 5 January 2012). The appellant appealed.

The First-tier Tribunal held that the appellant’s period of ownership (for PPR relief purposes in ss 222 and 223) began when he owned the legal and equitable interest in the lease of the apartment and owned the legal right to occupy it. That was the date of legal completion of the purchase of the lease on 5 January 2010. The period of ownership ended on 5 January 2012, when the contract for sale was completed. The appellant’s appeal was allowed.

The tribunal in Higgins considered that the ‘ordinary meaning’ of period of ownership should be applied (in ss 222, 223), and that the normal rules for determining the date of disposal and acquisition under a contract (in s 28) was not directly involved in determining the meaning of ‘period of ownership’ of a dwelling house in the context of the availability of PPR relief.

This decision is potentially good news, such as for purchasers of a PPR ‘off-plan’ in similar circumstances where there is a significant delay between entering into a contract for its purchase and completion of the contract. However, it should be noted that decisions of the First-tier Tribunal do not set a binding legal precedent (although they may be persuasive in similar cases). In addition, it will be surprising (to me at least) if HMRC does not appeal the decision. 

In any event, where an individual acquires land on which he has a house built, which he then uses as his PPR, by concession HMRC treats the period before the individual uses the house as his PPR as being used as such for relief purposes (in s 223(1), (2)(a)), if that period is not more than one year. This period may be extended to a maximum of two years if there are good reasons for exceptional delay, which are outside the individual’s control (Concession D49; see HMRC’s Capital Gains manual at CG65003).