When does property ownership start for the purposes of Principal Private Residence (‘PPR’)

A deciding case ………

Today’s Tax Bite looks into the facts and judgement issued recently by the Court of Appeal for Mr Desmond Higgins and his claim for Principal Private Residence (‘PPR’) relief on a London flat he bought ‘off-plan’ but where he couldn’t complete the contract or occupy the property for a number of years after the point of exchange.

PPR relief is an important capital gains tax (‘CGT’) relief which provides relief against a gain arising on the disposal of property that has been the individual’s only or main residence during their period of ownership. Full PPR relief applies i.e. no tax will arise on a disposal of a property, where it has been occupied as the main residence throughout the period of ownership. But when does a client’s ‘ownership’ start for the purpose of this relief?

Fortunately the Court of Appeal agreed with the client that the period of ownership for PPR proposes, starts only at completion of the contract, prior to which the tax-payer does not have the right to occupy the property. Hence Mr Higgins attracted full PPR relief against his capital gain as he had occupied the property as his main residence for his whole period of ownership.

This decision by the Court of Appeal will be relevant for many clients in light of the number of apartments being built in Manchester city centre (as well as other parts of the UK) at the moment, many of which are acquired ‘off-plan’.

The facts

  • In 2004, Mr Higgins paid a reservation deposit to secure a two-bedroom apartment in a development of the former St Pancreas Station in Central London. In October 2006, Mr Higgins entered into a contract with the developers. No development works had commenced.

  • Under the terms of the contract, the purchase price was set and was to be paid in various stages, with the majority being due on completion. Under the terms of the contract, completion would take place within 10 days of Mr Higgins being provided with evidence that the construction of the apartment has been substantially completed and the balance of monies would be payable at this time. Vacant possession was granted to Mr Higgins on completion. If completion had not happened by 30 June 2012, Mr Higgins had the right to rescind the contact and to be repaid his deposit payments plus interest.

  • The development was delayed by the credit crunch in 2008 and it was not until November 2009 that work began to construct the apartment. It was substantially completed in December 2009. Mr Higgins had no right to access the building until late 2009 when the apartment was under construction. Completion was scheduled for 5 January 2010 and took place on that date.

  • Mr Higgins then occupied the apartment as his main residence until it was sold. He entered into a contract for sale on 15 December 2011 which completed on 5 January 2012 for £1,215,000. Mr Higgins had only actually occupied the property as his main residence from 5 January 2010 to 5 January 2012.

  • HMRC tried to impose a CGT liability of £61,383 on Mr Higgins as if the gain arose since 2006 (when the contracts had been exchanged) as it regarded exchange of contracts as the start date of the property ownership for the purposes of PPR.

The arguments

HMRC’s argument was based on general CGT legislation (not PPR relief legislation) that states that when as asset is disposed of, or acquired under a contract, the disposal and acquisition is treated as being made at the time the contract is made. As a result, the period of ownership began at exchange, yet Mr Higgins had only occupied the property for around two years out of a possible six years of ownership. Hence PPR relief would need to be pro-rated.

Mr Higgins challenged this, arguing that there is no explicit definition of the period of ownership for the purposes of PPR relief. He believed the period of ownership for PPR purposes should start when he was first able to occupy the property; not the exchange of contracts. Therefore, he was entitled to full PPR relief.

The decision

The case went through various tax tribunals until the Court of Appeal ultimately found in favour of Mr Higgins’ argument. It mainly hinged on the fact that the tax-payer did not have the right to occupy the property prior to completion.

The Court of Appeal also commented that if HMRC’s argument was correct i.e. the date of ownership ran from the date of exchange of contracts, no one buying a new home would be able to claim PPR for the period between exchange and completion. They thought that this could not have been parliament’s intention when the PPR relief legislation was drafted.

Forbes Dawson’s view point

This is an interesting case and will be beneficial for clients who buy properties which will be their main residence ‘off-plan’ although it will be important to ensure that contracts are structured correctly to ensure that full PPR relief is available where applicable. Whether or not PPR relief will apply will be on a case-by-case basis but this case should be seen as a ‘win’ for the tax-payer.




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