An interesting tax case this year resulted in a victory for the taxpayer and heralded some good news for individuals who have bought or are going to buy a property off-plan.
In recent years, buying a property before it has been built – known as buying ‘off-plan’ – has become much more common practice, in particular with purchases of apartments.
Under UK tax rules, if the purchaser is buying the property to be used as their residence throughout their ‘period of ownership’, the purchase is exempt from capital gains tax (CGT). This is known as Principal Private Residence (PPR) relief. If the property is used as a residence for only a part of the period of ownership, then partial relief is available.
The rise in off-plan purchases has thrown up an interesting question: what is the period of ownership if the property can not immediately be used as a residence?
CGT or no CGT – a difference of opinion
Mr Higgins entered into a contract for the purchase of an apartment in October 2006. The credit crunch of 2007 led to construction being delayed until 2009 with the property finally being completed at the end of the same year. On completion, Mr Higgins paid the balance due and moved in on 5 January 2010. Mr Higgins decided to sell the apartment for a healthy profit two years later.
In this case, HMRC’s interpretation of the law was that the property was not used as a residence throughout this period and therefore liable for capital gains tax of £61,000. The owner, Mr Higgins, believed no charge should be payable.
The case focused on two specific but important provisions in the legislation:
• S28 TCGA 1992 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 provides that Principal Private Residence relief is available if the property has been the main residence of the individual throughout the ‘period of ownership’. Partial relief is allowed where the property has been the main residence for part of the period.
In most cases, there is little difference between the date of the contract (i.e. a binding agreement to buy) and completion of the contract (i.e. when a person can move into the property). By contrast, there was a period of several years between the date when Mr Higgins decided to buy and the date he could move in.
S28 TCGA can be a very useful provision in CGT planning, particularly when helping the taxpayer decide whether a disposal is made in one tax year rather than another. HMRC argued that it worked against the taxpayer in this case and that Mr Higgins’ period of ownership was from 2006 to 2011. By this logic, two sixths of the gain he made on selling the property 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. Therefore the apartment was his main residence throughout the ‘period of ownership’.
The Tribunal agreed with Mr Higgins. They found that the ‘period of ownership’ is not defined in legislation and should be given its ordinary meaning. As such, the period of ownership of a residence will usually begin on the date the purchase has been physically and legally completed and the purchaser has the right to occupy.