The Court of Appeal has issued a binding decision on when the period of ownership of a main residence begins for capital gains tax relief purposes. What is the key point, and what action do you need to take for your clients?

Recap: the Higgins case

The Court of Appeal has issued its decision in D. Higgins [2019] EWCA Civ 1860 (see Follow up ). This is the third decision on the particulars of Mr Higgins (H) following the initial First-tier and Upper Tribunal (FTT and UT respectively) hearings. H used an off-plan purchase for a flat to be constructed out of the shell of London’s old St Pancras Station Hotel. The credit crunch held up building work, and H didn’t move in for nearly four years.

Pro advice. Buying off-plan means contracting to purchase a property before construction takes place, i.e. literally buying based on the information on the marketing plans.

The crux of the case was exactly when H’s period of ownership began for the purposes of private residence relief (PRR).

H argued it was when he moved in, as it would have been impossible for him to take up residence any earlier due to the delays, which were outside his control. Conversely, HMRC argued it should be from the initial exchange of contracts. Let’s consider the facts in more detail.

Key facts

Contracts. H paid a reservation deposit in 2004 and exchanged contracts in 2006 with a further deposit being paid in 2007. The balance was due on completion, which, following the delays, took place in January 2010.

Building. At the initial contracts exchange, the apartment didn’t exist. It was simply a space in a tower. Building work didn’t commence until 2009.

Main residence. H sold his former residence in 2007 and had no other main residence prior to moving into the apartment in 2010. He then occupied it for two years before selling it.

Disposal. H sold the apartment at a gain of approximately £640,000. Contracts were exchanged in December 2011.

Tax. H claimed PRR on the full gain. The logic being that the period of ownership commenced when he moved in. HMRC disagreed and sought to charge him more than £60,000 on the basis that his period of ownership started in 2006, and the PRR claim had to be restricted accordingly.

Pro advice. Off-plan sales may be subject to increased scrutiny from HMRC. In particular, there may be a challenge to a PRR claim if HMRC believes a property is purchased with the intention to make a profit rather than to occupy it materially as a residence.

Delayed occupation and ESC D49

If you have clients who have purchased a property, but haven’t been able to take up occupation immediately, your first thought will probably be ESC D49 . It permits a delay of up to twelve months to move into a main residence without prejudicing a full PRR claim.

Pro advice. This can be extended to two years at HMRC’s discretion, but only in exceptional circumstances.

In practice, ESC D49 is intended to apply to situations where a property needs extensive renovation before it can be occupied, or where a building site with planning permission has been purchased, and the property needs to be built. However, ESC D49 couldn’t be used in H’s case as the delay was considerably longer.

Pro advice 1. It is worth noting that ESC D49 is scheduled to be enshrined in law by the next Finance Act. This will mean your clients will be able to challenge HMRC at the Tribunals if they are on the receiving end of unfavourable decisions regarding delayed occupation without needing to rely on HMRC discretion.

Pro advice 2. Advise clients that HMRC is looking for gaps between purchase and occupation as a residence. As evidence can be difficult to establish retrospectively, changes of address etc. should be actioned as soon as possible. If the conditions of ESC D49 are not met, PRR will only apply from the actual date of occupation.

Pro advice 3. Buying a property piecemeal can be particularly risky. HMRC stipulates that the one or, exceptionally, two year period for ESC D49 starts from the acquisition of the first plot under s.222(7) Taxation of Chargeable Gains Act (TCGA) 1992 .

First-tier Tribunal

At the FTT, the argument was about the period of ownership for the purposes of s.s.222 and 223 TCGA 1992. Specifically, did it begin on exchange of contracts or completion?

The FTT decided that the period of ownership began when H owned the legal and equitable interest in the lease of the flat and the legal right to occupy. It defined the period of ownership as the time between completion dates. That meant the entire gain was exempt.

HMRC appealed against the decision, arguing that the period of ownership ran from exchange of contracts, including the years where H didn’t occupy the property because it didn’t exist.

Upper Tribunal

HMRC’s appeal to the UT centred on s.28 TCGA 1992 which determines that where an asset is disposed of under a contract, the key date is that of exchange, not completion.

Pro advice. S.28 is not specifically mentioned as applying to PRR and the courts have previously held that it does not apply universally.

The UT said H had acquired a taxable asset, i.e. an equitable interest in the vendor’s head lease, and was legally able to dispose of this even before completion had he wanted to.

The UT decided the gain arose over the period between exchange of contracts for purchase and exchange of contracts for sale. So only the proportion of the gain arising while the property was occupied as a main residence received PRR.

Court of Appeal

The Court of Appeal adopted a commonsense approach and said that HMRC’s argument was at odds with the basic intention of Parliament. Starting the period of ownership from contract rather than completion, meant most taxpayers would stand to forfeit some element of PRR.

It highlighted “the inherent implausibility of Parliament having intended the principal private residence relief provisions to have a meaning that does not afford complete relief from CGT in the typical case of an individual or couple buying and occupying a property as their only home.”

It decided that for PRR purposes, the period of ownership begins at the completion date, and that the period between exchange of contracts and completion isn’t part of the equation. PRR was therefore available in full.

What do you need to do?

The first takeaway point is to note that HMRC could appeal against the decision. However, it is currently the precedent. When reporting gains for clients in similar circumstances, ensure you use the date of completion when calculating PRR entitlement.

The next point is to appreciate that the change in practice means that some clients may have previously overpaid if the date of exchange has been used, and this affected the amount of PRR claimed. Finally, it is worth remembering that PRR is very much an active area for HMRC. Advise clients to keep as much information regarding dates etc. as possible from the outset.

Pro advice. Undertake a file review of property disposals for your clients to identify any off-plan purchases. If you find any cases where the tax would be lower taking into account the Higgins decision, amend returns or submit a claim for overpayment relief (see Follow up ) to rectify matters.

The key point is that for the purposes of private residence relief the period of ownership starts at the date of completion, not exchange of contracts. Review your client files for disposals of property purchased off-plan as you may need to amend your computations to reclaim tax already paid.

Follow up

Guidance on overpayment relief
D Higgins [2019] EWCA Civ 1860