A recent Court of Appeal case (HMRC v. Higgins) has resulted in a decision which left the taxpayer with a potentially expensive tax outcome and provides everyone who owns their own home with food for thought.
Most people are aware that one of the exceptions to the rules on capital gains tax (CGT) - the tax you pay when you sell something and make a profit on the price you paid for it - is that you do not pay such tax when selling your main home. This is known as principal private residence relief (PPR).
When calculating PPR from CGT, the length of time that the property is the individual's only or main residence is divided by the length of the period of ownership in order to calculate what fraction of the gain is relieved.
In the reported case, Mr Higgins contracted to buy a flat off-plan from a developer in October 2006, at which point the flat had not been built. The development was delayed by the credit crunch, was not completed until 2009 and he was not permitted to occupy it until January 2010 when he completed the purchase. Mr Higgins later sold the flat in January 2012 and claimed PPR on the entire gain (i.e. the difference between the price he paid and the price he sold it for), claiming that he had been in occupation for his entire period of ownership. HMRC denied him full PPR because of the period between exchange of contracts and completion when Mr Higgins was not in occupation.
After two lower Court decisions (the first finding in favour of HMRC and the second in favour of Mr Higgins), the Court of Appeal agreed with the first decision in finding that he could only claim PPR from the period from the date when he completed the purchase. Due to the unusual length of time between exchange and completion, Mr Higgins was only able to claim relief from a fraction of the increase in value.
Bearing in mind that the original purchase price paid by Mr Higgins for the flat was £575, 000 and that he sold it for £1,215,000, the number at stake was significant – HMRC assessed Mr Higgins’ CGT liability at over £61,000.
The consequence of this case is that most homeowners will be unable to obtain full PPR, because occupation normally only begins when a purchase is completed. In normal house sales and purchases, the length of time between exchange of contracts and completion is likely to be relatively small (a matter of a few days or weeks), such that HMRC is unlikely to investigate any potential gain. In “off-plan” purchases, however, where there is a long gap between exchange and completion (and particularly in a rising market), HMRC are likely to take a much keener interest and taxpayers will need to think carefully about (and be properly advised on) how they fill in their tax returns to HMRC.