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A space to live or just a space?

View profile for Paul Thompson
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A taxpayer has won an important victory over HM Revenue & Customs (HMRC) in a case involving a claim for principal private residence (PPR) relief.  Had HMRC’s view been upheld it would have meant that it was possible to “occupy” a home that did not yet even physically exist!

The saga starts back in October 2006 when taxpayer, Desmond Higgins, entered into a contract to lease an apartment in the former St Pancras Station Hotel.  Developers had submitted plans to fully renovate the iconic hotel with the aim of bringing the building back to its former glory and, at the same time, converting some areas of the upper floors (including the Victorian servants’ quarters) into apartments.  At the time the 125-year lease was signed, the building work had not yet started. 

Therefore, Mr Higgins was purchasing “off plan” and the area that would become his apartment was, at that time, in the words of the First-tier Tax Tribunal (FTT), simply “a space in a tower”.

Unfortunately, due to the 2008 credit crunch, the developers had to seek alternative finance and work on the apartment did not actually start until November 2009.  However, the project was then completed rapidly.  The sale was completed on 5 January 2010, at which date Mr Higgins had a right to occupy the apartment.  He duly moved into the property on 5 January 2010 and then occupied it as his main residence until he signed a contract for sale on 15 December 2011, with completion taking place on 5 January 2012.  PPR relief was claimed to exempt the sale from capital gains tax (CGT).

However, HMRC disputed that the gain was fully exempt.  They argued that Mr Higgins’ acquisition date was in October 2006 when he signed the lease contract and that the disposal date was 15 December 2011; as the property had not been the taxpayer’s main residence throughout the whole of that period PPR relief would be restricted.  Therefore, PPR relief would only cover the final 36 months of ownership (the disposal was prior to the subsequent restriction of PPR relief for the final period) which then left approximately 26 months of the ownership period not covered by relief and so a CGT charge would arise.

But … in October 2006, the apartment hadn’t been built.  It was identified on the plans - but there was no physical space that could have been occupied!

Unsurprisingly, Mr Higgins took his case to the FTT who agreed with him that PPR relief applied for the whole period of ownership.  They concluded that the period of ownership could only have commenced on 5 January 2010 when the purchase was legally and physically completed and there was a right to occupy for the purchaser.  

HMRC appealed the FTT decision, and in September 2018 the Upper Tax Tribunal (UT) overturned the previous decision and agreed with HMRC that the ownership period commenced when contracts were exchanged in October 2006 but that PPR relief could only apply for a period when the taxpayer was in residence.

As there was a significant amount of capital gains tax at stake – in excess of £61K – Mr Higgins made a further challenge to HMRC and took his case to the England and Wales Court of Appeal (EWCA).  The outcome of that judgement was published on 4 November and was a win for Mr Higgins.  All three of the EWCA judges agreed that the period of ownership could not commence until the sale had completed and there was a right of occupation.  They did not believe that the PPR legislation was designed to disadvantage taxpayers buying off plan where there is frequently a period between exchange of contract and completion.   As a result of the Court of Appeal decision, CGT charges were fully cancelled.

Whilst this outcome is undoubtedly good news for anyone considering purchasing off plan, it also indicates how far HMRC will challenge claims for PPR relief – apparently even to the extent of deeming an empty space on a building site to be a residence!