Written by Matthew Biles
In the recent case of HMRC v Higgins (2018 UKUT 280) the Upper Tax Tribunal ruled that “off plan” property purchasers will not be able to claim the traditional relief from capital gains tax (CGT) for the period prior to them moving into their new properties.
In the UK a common practice for buyers interested in new residential developments is to purchase a property from the developer prior to its construction completing (or indeed in some cases prior to it commencing); these are known as “off plan” purchases.
Under UK tax legislation, individuals who sell their main residences receive a total relief from CGT (otherwise applicable at rates of 18% or 28%) on any profit made due to the Principal Private Residence (PPR) relief. The key requirement for claiming PPR relief is that the relevant property is the main home of the taxpayer in question.
Facts of the case
In October 2006 Mr Higgins exchanged contracts and paid a deposit to purchase an apartment in the tower of St Pancras Station in London. The apartment had not yet been built and, due to the financial crisis of 2008, was not completed and ready for occupation until January 2010. At this time Mr Higgins completed the £575,000 purchase and moved in.
During the period the apartment was under construction Mr Higgins had no other main residence after his previous home was sold in 2007. In the interim he stayed with his parents, travelled the world and stayed on occasion in another apartment that he owned.
In January 2012, exactly 2 years after he first moved in, Mr Higgins sold the apartment for £1,215,000 realising a significant capital gain. Mr Higgins claimed PPR relief for the full period of his ownership but HMRC rejected part of his claim relating to the period he was not in occupation and sought to recover over £60,000 of CGT.
The key issue was how the period between the exchange of contract and completion of that contract should be viewed for tax purposes. A buyer and seller are legally bound to complete a sale upon exchange and indeed this is the date from which CGT is calculated from the buyer’s personal tax perspective. Completion is the date on which the exchanged contract is completed and the buyer acquires the legal title and right to occupy the property.
Mr Higgins initial appeal to the First-tier Tax Tribunal was successful and PPR relief was applied to the whole period of his ownership. However HMRC recently appealed the case to the Upper Tax Tribunal (UT) which overturned the ruling and held that PPR relief should be denied for the period prior to Mr Higgins’ physical occupation of the property.
It was accepted by all parties that an acquisition cost was fixed when a contract was exchanged by the parties. If he wished, Mr Higgins could then have sold his right to the property in a sub-sale and all parties accepted PPR would not have been available in such circumstances (as he had not yet occupied the property). Mr Higgins sought to differentiate his circumstances by arguing that his subsequent occupation of the property, and treatment of it as his main residence, should allow PPR relief to be applied all the way back to the date of exchange. Indeed this had been the approach taken for such matters in all previous reporting.
In its judgment the UT adopted a very literal interpretation of the legislation highlighting that a relief based on a property being treated as a main residence should not apply to a period of ownership when construction had not been completed. However the acquisition date for CGT calculation purposes remains the date of exchange.
The decision of the UT reverses HMRC’s long standing approach to such tax reporting. Taxpayers who currently own “off plan” properties may well now have a latent 28% CGT liability that they were not advised of at the time of their purchase – and could well still be unaware of.
The UT’s decision, if not appealed, could also have significant implications for large scale residential developers in the UK. A number of such property developers fund their ongoing developments via such “off plan” early sales. If such purchases dwindle then this may cause liquidity issues for some developers or make such developments less appealing. It remains to be seen how significant any such impact will be and, if severe, whether the issue will be considered at governmental levels.
If you have purchased an “off plan” residence, are considering doing so or indeed are planning to undertake substantial works to a newly purchased home prior to moving into it, it is worth seeking legal advice in order to fully understand the potential CGT implications (as in the latter case PPR relief may be available) and what steps could be taken to mitigate any such liability.
Contact the Author
I trained and qualified at Fladgate LLP where I worked for 11 years before joining Gordon Dadds as a Partner in 2018. I have almost 10 years of experience in private client work. I specialise in capital gains tax and income tax including advising non-domiciled individuals on residence and remittance issues and advise on trusts (both onshore and offshore) and inheritance tax planning. I have extensive experience acting on the setting up and administering of UK charities. I regularly write on private client issues and am a member of STEP. My interests outside of work include football, hiking, travelling, history and current affairs. Qualifications: LLB - Bachelor of Law LPC - Legal Practice Course STEP Diploma - Administration of Trusts & Estates.