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The recent decision in the case of HMRC v Desmond Higgins  UKUT 280 (TCC) confirms that Private Residence Relief (PRR) in relation to gains made on the sale of a house, originally purchased off-plan, does not apply to the time between the exchange of contracts, completion and moving in.
Mr. Higgins purchased an off-plan property from a developer in London.
Mr. Higgins paid an initial reservation fee for the property in 2004 and exchanged contracts with the developer for a lease on the property in October 2006. Alongside this, Mr. Higgins sold his existing property in July 2007.
The building of the overall development was delayed because of the financial crisis in 2008 and as a result, completion on the property did not occur until early 2010, when Mr. Higgins moved in. He then occupied the property until it was sold in early 2012.
When the property was sold, Mr. Higgins realised a gain, which he sought to relieved by PRR. However, HMRC sought to tax a proportion of this gain, contending that this property was owned at the point the parties exchanged contracts in October 2006 and therefore, PRR only applied from the point that Mr. Higgins moved into the property from early 2010 to early 2012.
In the First-Tier Tribunal, it was held (per para. 10),
“The period of ownership for the purpose of sections 222 and 223 began when Mr Higgins owned the legal and equitable interest in the lease of the Apartment and owned the legal right to occupy the Apartment. That was the date of legal completion of the purchase of the lease on 5 January 2010.”
As a result, it was held that the PRR legislation applies from the point that the taxpayer owns the legal and equitable interest in the property and owns the legal right to occupy the property. Therefore, PRR did apply to the whole gain and the relief would not be proportionately discounted.
In the Upper-Tier Tribunal, HMRC argued that s.28 TCGA 1992 establishes that the point of acquisition of the asset is at the point where a contract for sale is created. Therefore, asserting that Mr. Higgins owned the lease in October 2006.
In contrast, counsel for Mr. Higgins argued that there is nothing in the PRR legislative provisions that indicates that the point of ownership should be defined by s.28 and neither is there anything in s.28 to state that it defines the period of ownership for PRR.
The Tribunal determined that the lease was purchased in October 2006. Although Mr. Higgins and the developer did not complete until 4 years later, Mr. Higgins had acquired a right in October 2006 and this was something he could have sold from this point onwards.
Further, the Tribunal held there was no reason for the First-Tier Tribunal to restrict the PRR provisions to justify a narrow construction of the legislation so that, (per para 21.)
“a period of ownership cannot begin before the taxpayer has a right of occupation.”
It concluded, (per para 41.)
“As we have said, the purpose of [the PRR provisions] is to restrict the gain pro rata where the asset is not the taxpayer’s main residence for the whole of the period over which the gain accrues. There is nothing absurd or unfair in a construction which restricts relief for off-plan purchases because in the period before the dwelling is constructed it is clearly not the taxpayer’s main residence. The gain does not arise only in respect of a period in which it is the taxpayer’s main residence but across the whole period between the date when the purchase price is fixed by the contract for acquisition and date when the sale price is fixed by the contract for disposal.”
How may this affect you? ESC. D49 – Private Residence Relief
Also referred to in the case, HMRC provide for an extra-statutory concession (ESC. D49), which affords taxpayers with relief where there is a gap of no more than 1-year between the acquisition of the land and the point where the taxpayer is resident in the house, in circumstances where,
• There is a delay due to the property being built,
• There is renovation or redecoration work being undertaken in the property; or,
• There are arrangements currently taking place to sell the previous property.
HMRC may extend this from a 1-year to 2-year period at its discretion, if there is good reason. However, in Mr. Higgins’ case, there was a 4-year period between the point of acquisition and the point where he was resident in the property.
Therefore, although HMRC clearly do offer a concession in such circumstances, HMRC are entitled to tax anyone who falls outside of the concessionary period.
This case should be particularly noteworthy to those who have had a significant delay between legally acquiring their property and the point at which they moved into the property, alongside those who are considering purchasing an off-plan property. Consequently, if this may apply to you, it may be worth noting the considerations below.
What can I do if there was a delay of 1-year+ between purchasing a property and moving in?
If you exchanged contracts and moved into the property following a period of more than one year, then following the decision in Higgins, it may be that HMRC will seek to tax a proportionate gain relative to that period.
ESC. D49 does offer discretionary relief for those who fall into the concessionary criteria for up to 2 years, however this will be exercised on a case by case basis.
One option may be that you consider delaying the sale of your property so that you proportionately spread the gain across as many years as possible so that the PRR will cover a greater proportion of the gain. This will involve an element of estimation, considering the likely future property value, alongside considering your personal circumstances and how long you can effectively delay selling your property.
What precautions can I take if I am purchasing an Off-Plan property?
In practice, as in this case, contracts between purchasers and developers may often contain clauses that enable the buyer to rescind the contract if the completion date exceeds a specified date.
It will certainly be noteworthy for purchasers and conveyancers to be aware of this issue and include a clause into purchase agreements to rescind the contract between the parties, if completion exceeds 1-year from the acquisition date. This would ensure that the time between the acquisition and completion fall within ESC. D49, relieving the client of any gain made on their property if and when it is later sold.
For further information on private residence relief please see our ‘Signpost’ document on this subject.
Read more recent tax cases. Or for general information on private residence relief please see our ‘specific PPR Signpost’ document on this subject.