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’.
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 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.
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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