When you purchased your home, when did you consider that you became the owner? From the date of exchange in the solicitor’s office when you paid your deposit – or from the date of completion six weeks later when, key in hand and removal van outside, you unlocked the door and crossed the threshold?
The question might seem pedantic but, when it comes to the amount of private residence relief (PRR) available to a homeowner, knowing exactly what is the period of ownership really matters. In the case of Mr Higgins, it mattered to the tune of just over £61,000.
While his case concerned an ‘off-plan’ purchase, how the period of ownership has been defined will be relevant to many ordinary residential property purchases.
The Higgins case
The Higgins case featured an apartment in the former St Pancras Station Hotel. Mr Higgins purchased the apartment ‘off-plan’, and for much of the time in question the flat itself did not exist and was merely a ‘space in a tower’.
Mr Higgins entered a contract to buy a leasehold interest in October 2006, paying a deposit. He paid a further deposit in March 2007 but work stalled during the credit crunch of 2008 and it was not until November 2009 that work finally commenced to bring the apartment into existence.
The work was completed rapidly, with Mr Higgins able to occupy the property from 5 January 2010. At that point the purchase was completed and the balance of the purchase price was paid. He then lived in the property until 5 January 2012 when he sold it, having exchanged contracts for its sale on 15 December 2011.
By the time of sale, the flat had appreciated significantly in value and Mr Higgins made a substantial gain for which he sought private residence relief.
The period of ownership
Very broadly, private residence relief is available in full where the property has been the individual’s only or main residence throughout their period of ownership.
Having lived in the flat for the entire time that it was possible to do so (5 January 2010 to 5 January 2012), Mr Higgin’s argument was that he had been in residence for the entire period of ownership and was therefore entitled to full relief from the gain under private residence relief.
While accepting that Mr Higgins was entitled to some PRR, HMRC took the view that the period of ownership for the purposes of PRR should follow the dates determined by s28 of TCGA 1992. That section sets out the time of disposal and acquisition for CGT purposes when an asset is disposed of under contract (as had occurred here).
Under the section, the date of acquisition where the contracts are unconditional is taken to be the exchange date. HMRC’s argument was that the period of ownership for PRR would be from October 2006 to December 2011. Mr Higgins would then only be entitled to PRR for a fraction of his gain.
The Tribunal view
The First Tier Tribunal (FTT) in March 2017 agreed with Mr Higgins and concluded that the period of ownership should take its ordinary meaning and run from January 2010 when he first acquired the right to occupy the property, to January 2012 when the sale completed.
HMRC appealed, and the Upper Tribunal (UT) overturned the FTT’s decision in September 2018, concluding that his period of ownership started from exchange of contracts in October 2006 and ended on 15 December 2011 – the dates of unconditional contracts. Mr Higgins appealed to the Court of Appeal.
Striking out HMRC’s arguments
The Court of Appeal (CA) has now returned the position to that determined by the FTT – with the CA finding as ‘a striking fact’ that following HMRC’s arguments would result in very few people buying a new home ever receiving PRR in full.
There is almost always a gap between exchange and completion during which the purchaser is not able to occupy the property. Interpreting the period of ownership for PRR purposes as starting at the exchange date would mean anyone acquiring a new home who did not exchange and complete on the same day would not be entitled to full PRR.
For most people, ownership feels like it starts when they stand on the threshold with the key. Given that the relevant sections on PRR do not refer to s28, the court took the view that the period of ownership should follow its ordinary meaning.
HMRC argued that, in practice, the amount of unrelieved gain under their interpretation would be so small as to be negligible or that computations made on the basis of months rather than days would effectively cover any gaps in PRR. The CA rejected these arguments, viewing it as ‘inherently implausible’ that Parliament would not have intended for full PRR to apply in the simple case of an individual purchasing a single home to live in.
What does it mean in practice?
This is a helpful and practical decision, clarifying as it does the distinction between the date of exchange relevant to the timing of CGT (where the provisions of s28 apply where there is a contract), and the dates of completion relevant to considering the period of ownership for PRR where s28 does not apply.
For CGT purposes, it will therefore be necessary to determine both the exchange date, to understand when the transaction occurred, as well as the completion dates for PRR purposes.
From April 2020 advisers and their clients will need to pay more attention to completion dates in order to comply with the new 30-day reporting rules, so this should not generate significantly more work. It also means that PRR can be interpreted in line with the practical reality of gaining the right to occupy on completion.
What about D49?
Finally, how does this all interact with the provisions of ESC D49, which allow PRR when there is a period of 12 to 24 months between buying land and the individual moving in?
ESC D49 was never going to help Mr Higgins as it does not apply to off-plan purchases and the CA specifically distinguished the case from contracting to buy a plot on which a house is built.
D49 remains helpful where the property purchase has been completed and then the individual takes a limited period of time to build or renovate a house (or to sell a previous home) before taking up residence. It should be noted though that we are expecting D49 to be legislated in the next Finance Act. The precise conditions where the new provision applies may be slightly different from April 2020.
Helen Thornley is ATT’s Technical Officer