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Residential property ownership only starts when purchase is completed, says appeal court

Thursday, 7 November, 2019

The England and Wales Court of Appeal (EWCA) has upheld Desmond Higgins' claim for principal private residence (PPR) relief on a flat he bought off-plan, but was unable to occupy for four years because its construction was delayed.

Higgins put down a deposit on the flat at St Pancras Station in London in 2006, exchanging contracts before the developer had even started work. The 2008 financial crisis interrupted the development, and the flat was not finished until January 2010, when Higgins completed the purchase and moved in. Prior to 5 January 2010, he had no right to occupy the flat.

He sold the lease two years later at a significant profit, and HMRC charged him capital gains tax (CGT) of GBP61,383 for the gain since 2006, as it regarded the exchange of contracts as the start date of ownership.

HMRC cited s.28 of the Taxation of Chargeable Gains Act 1992 (the Act), which states that where an asset is disposed of and acquired under a contract, the disposal and acquisition is made at the time the contract is made. It granted him PPR relief pro-rata only for the period he had actually occupied the flat.

Higgins challenged this assessment, arguing that his chargeable period of ownership began with the completion of the purchase, not the exchange of contracts, and thus he was entitled to full PPR relief. The First-tier Tax Tribunal agreed with him and cancelled the CGT charge, but the Upper Tax Tribunal allowed HMRC's appeal and reinstated it. It held that taxable gains begin to accrue as soon as contracts are exchanged, but the PPR exemption applies only when the taxpayer is in residence.

Now Higgins has won his appeal in the EWCA. The court agreed with him that his period of ownership for CGT purposes started only when he completed the purchase, until which time he had no right to occupy the property, it said.

The central point turned on the meaning of the words 'period of ownership' in s.223 of the Act, which sets out the conditions for PPR relief, but does not refer to s.28 of the Act. The EWCA reasoned that if HMRC's argument was correct and the date of ownership ran from the date of exchange of contracts, then few people buying a new home would be able to claim PPR for the period between exchange of contracts and completion. This, it thought, could not have been parliament's intention in drafting the legislation.

'The fact that the construction of the provisions that HMRC favour would rarely entitle ordinary home-owners to full relief from CGT strongly suggests that the construction is incorrect', commented Newey LJ. He agreed with the First-tier Tax Tribunal's conclusion that such a view would be 'perverse'.

The other two judges agreed, and the court duly allowed Higgins' appeal, cancelling the CGT charge (Higgins v HMRC, 2019 EWCA Civ 1860).