An interesting tax case was heard before a First-tier Tribunal this year and has resulted in a victory for the taxpayer. The case is good news for individuals who have bought or who are making off-plan property purchases. Buying off-plan property means purchasing property – typically an apartment – in advance of its completion and has become much more common in the UK in recent years.
If this property is a residence of an individual for all their ‘period of ownership’ the UK tax regime provides an important relief from a capital gains tax charge. This is known as Principal Private Residence relief (PPR). Partial relief is available if the property is a residence for part of the period. The intriguing question that has been answered by this tax case is - what is the ‘period of ownership’? In HMRC’s view, their interpretation of tax law resulted in a capital gains tax (CGT) charge of over £61,000. Mr Higgins thought no charge was more appropriate.
Why the difference of opinion?
The case turned on the interpretation of two specific but important provisions in the legislation:
- S28 TCGA 1992 – which stipulates that a person is deemed to have acquired or disposed of an asset when a contract is made and not, if different, the time at which the asset is conveyed.
- S222 TCGA 1992 – which provides that PPR is available if the property has been the main residence of the individual throughout the ‘period of ownership’. Partial relief is given if the property has been the main residence for part of the period.
Often there is little difference between the date of the contract (ie there is a binding agreement to buy) and completion of the contract (ie when a person can move into the property). In Mr Higgin’s case however, he entered into the contract for the purchase of an apartment in October 2006. Construction did not start on the apartment until 2009, and it was finished in December 2009. The credit crunch in 2007 had held up the developer somewhat. Mr Higgins paid the balance due on completion and moved in on 5 January 2010.
Two years later, Mr Higgins sold the property at a healthy profit.
S28 TCGA is a very useful provision in CGT planning particularly in allowing a taxpayer to decide whether a disposal is made in one tax year rather than another. But HMRC argued the section worked against the taxpayer in this case. They argued that s28 meant that Mr Higgins owned the property from 2006 to 2011. This was his ‘period of ownership’ for the capital gain and therefore only 2/6ths of the gain was eligible for PPR. Mr Higgins argued that for the purposes of PPR his period of ownership began when he had the right to occupy the property and so the property was his main residence throughout the ‘period of ownership’.
The Tribunal agreed with Mr Higgins. The ‘period of ownership’ is not defined in legislation and should be given its ordinary meaning. A period of ownership of a dwelling house will ordinarily be said to begin on the date the purchase of the dwelling house has been physically and legally completed and the purchaser has the right to occupy.