Property owner loses tax case over off-plan purchase

The Upper Tribunal has upheld an appeal by HMRC in the case of principal private residence relief (PPR) on the off-plan purchase of an apartment delayed in construction

The Commissioners for HM Revenue and Customs v Desmond Higgins: [2018] UKUT 0280 (TCC) was an appeal by HMRC against an earlier decision in Desmond Higgins v HMRC [2017] UKFTT 236 (TC), which concerned the off-plan purchase of an apartment in London. Higgins paid a reservation deposit of £5,000 in 2004 but issues relating to the title to the site prevented construction from commencing for some time, and Higgins took residence in the apartment from 5 January 2010 until 5 January 2012, whereupon he sold the property.

HMRC determined that from this sale Higgins was liable for capital gains tax (CGT) to the value of £61,383. Higgins argued that the ownership of the asset was liable for PPR as, although he intended to occupy the apartment, it ‘was identified on the plans but did not then exist’.

The First Tier Tribunal (FTT) concurred with an argument made by Higgins made on the basis that s222 and 223 of Taxation of Chargeable Gains Act 1992 (TCGA 1992) specify that ‘the period of ownership of a dwelling house will ordinarily be said to begin on the date the purchase of the dwelling house has been physically and legally completed and the purchaser has the right to occupy’.

In the course of HMRC’s appeal, representative Christopher Stone contended that the FTT had erred ‘because it focused on identifying the purpose of the relief, but then ignored the fact that the statutory provisions go on to restrict the relief in circumstances where the period of ownership is longer than the period when the dwelling is used as a main residence’ and failed to have due regard to s28 of TCGA 1992, which defines the bounds of the period of ownership of an asset.

In considering the appeal, Judge Jonathan Cannan considered the defence of Higgins’ representative, who relied on an alternative argument concerning section 224(2) of TCGA 1992, but ruled in favour of HMRC on the basis that Higgins had failed to send a timely Respondent’s Notice in accordance with Rule 24 of the Upper Tribunal Rules and should be refused permission to raise the alternative argument. The argument based on section 224(2) was dismissed as it ‘restricts relief where there is a change in what is occupied as the individual’s dwelling’ and this was ‘directed at circumstances where an individual occupies a dwelling-house but there is then a change in what is occupied. The change must follow a period of occupation. There must be a change in “what” is occupied.’

Bill Dodwell, senior policy adviser at the Office of Tax Simplification (OTS), said: ‘The Upper Tribunal’s decision in Higgins illustrates one of the pitfalls of buying flats before they are ready for occupation.   

‘He claimed that the sale was exempt from capital gains tax, on the basis the flat had been his main residence throughout his period of ownership.  However, HMRC disagreed, noting that he started occupation only in 2010 - and that the capital gains tax rules allocated the gain on a time basis, over the full period of ownership.  Sadly for Mr Higgins, the Upper Tribunal has agreed with HMRC, overruling the First Tier Tribunal.

‘Effectively, buying off-plan means that any gain is likely to have an investment element, now taxed at 28%.’

Report by James Bunney

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