The Court of Appeal has ruled that the ‘period of ownership’ for principal private residence (PPR) relief from capital gains tax (CGT) begins when the property purchase is completed, not from exchange, in a ruling which overturns a previous tribunal finding in HMRC’s favour
The case involved Desmond Higgins, who had challenged a CGT bill of £61,383 on the basis that the property had not been his only or main residence for all of his period of ownership. While he was successful at a First Tier Tribunal (FTT), the Upper Tribunal reversed the decision, finding in HMRC’s favour, and Higgins took his case to the Court of Appeal. [Desmond Higgins and the Commissioners for Her Majesty’s Revenue and Customs,  EWCA Civ 1860]
In 2006 Higgins paid a reservation deposit to secure a two-bedroom apartment to be constructed on the site of the former St Pancras station hotel in London. He exchanged contracts and paid a further deposit in October 2006 (before development had begun), with a second deposit being paid in March 2007, and completed the purchase on 5 January 2010, at which point he became entitled to occupy the property, which had been substantially completed in December 2009.
He occupied the property as his main residence from completion of the purchase until completion of its sale in January 2012 (exchange in December 2011).
HMRC denied full PRR on the grounds that Higgins had not occupied the flat for the entire period of ownership, which in its view began on exchange in October 2006 and ended in December 2011.
The Court of Appeal said the central question was the meaning of the words ‘period of ownership’ in section 223 of the Taxation of Chargeable Gains Act 1992 (TCGA). If that period did not begin until 5 January 2010, then the apartment was his main residence ‘throughout the period of ownership’ and no CGT can be payable.
If, on the other hand, Higgins' ‘period of ownership’ began when contracts for the purchase were exchanged, which was much earlier, then section 223(2) would apply and Higgins would enjoy relief from CGT as to only part of the gain he made on the apartment.
HMRC sought to argue that the words ‘period of ownership’, on their ordinary meaning, refer to the period between acquisition and disposal. For CGT purposes, section 28 of the TCGA confirms that, where an asset is disposed of and acquired under a contract, the time at which the disposal and acquisition is made is the time the contract is made. That meant the date of acquisition was 2 October 2006, when contracts were exchanged, not 5 January 2010, when completion took place.
It did not matter if there were different interests at different times, and this was in fact catered for by s. 222(7) which stated that the period of ownership began in these circumstances from the date of the first acquisition.
Moreover, HMRC said the FTT's approach would mean that, contrary to the evident intention of the legislation, someone could enjoy relief in respect of gains made on more than one property at the same time. That could happen if, say, someone sold his existing main residence and moved to a new one that he had just bought pursuant to a contract made five years earlier, by reference to the prices current then.
Responding to this argument, the Court of Appeal stated that it was ‘a striking fact’ that if HMRC was correct, ‘few people buying a new home would be within the scope of section 223(1) of the TCGA and so fully relieved of any possible CGT liability.’
The court said: ‘Exchange and completion do not usually take place on the same day. On HMRC's case, therefore, a purchaser would normally be treated as having acquired "ownership" on a date before completion and before there could have been any question of going into residence.
‘Where such a purchaser re-sold at a profit in a rising market, he would necessarily be entitled to relief in respect of only a "fraction of the gain" even where the property had been his home ever since his purchase had been completed.
‘Parliament would thus have failed to confer complete relief from CGT in what it surely will have considered the paradigm case.’
The court did not accept HMRC’s arguments that this anomaly was effectively remedied by the fact that frequently only small liabilities would arise and in practice short delays are ignored, and considered that the strong likelihood was that HMRC’s interpretation was incorrect.
Instead, the Court of Appeal found that HMRC’s interpretation of ‘period of ownership’ ran counter to the ordinary meaning of the words, as a purchaser would, as a matter of ordinary language, only be described as the owner post completion.
Moreover, it was hard to see how ownership could have commenced before completion of building work, as the apartment did not then exist (and this could be distinguished between purchase of a plot of land and subsequent construction of a dwelling, catered for by ESC 49, as in that case the land existed throughout).
One of the judges said: ‘In my view, 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.
‘The FTT said at paragraph 6(4) of its decision, 'To say the period of ownership begins when a contract to acquire a dwelling is entered into, at which time it would be highly unusual for a purchaser to have a right to occupy, would be perverse in the context of providing relief to individuals for gains realised on the sale of a private principal residence'.’
In the particular case under consideration, the court said it would anyway be hard to see how Higgins' ‘period of ownership’ of the apartment could have begun before late 2009, since when contracts were exchanged in 2006, the apartment was just a ‘space in the tower’. The apartment did not come into existence until November/December 2009.
The judges did not agree that the taxpayer’s interpretation could enable individuals to obtain relief for more than one property at the same time, as the legislation makes clear that a person cannot claim to have more than one main residence at any one time (see for example, s222(5)).
In conclusion, the Court of Appeal agreed with the FTT that the period of ownership for PRR did not begin until completion of the contract and allowed the appeal against the Upper Tribunal decision.
Stephanie Webber, tax writer at Croner-I, said: ‘There is likely to be much relief at this judgment, as the use of completion dates both ensures most taxpayers will obtain full relief and avoids any need to rely on unpublished HMRC practice. It remains to be seen whether there will be a further appeal.’
By Pat Sweet