Mark McLaughlin highlights a potential restriction in capital gains tax private residence relief in common circumstances.
Most homeowners will be aware that if they buy a house and live in it as their only or main residence throughout their period of ownership, there should be no capital gains tax (CGT) to pay when they sell the property, due to principal private residence (PPR) relief.
The concept of PPR relief is straightforward enough. Unfortunately, circumstances can result in the relief being restricted (or denied). For example, there may be a delay between an individual acquiring a dwelling and occupying it as their only or main residence.
Short delays: HMRC’s concession
However, in some cases, HMRC will treat short delays by the owner-occupier when moving in as a period of occupation for PPR relief purposes (Concession D49). Those circumstances are broadly where the residence is being built, altered or redecorated, or where the disposal of the taxpayer’s previous residence is still being dealt with.
HMRC concessionally allows PPR relief for up to one year in the above circumstances. However, if there are good reasons for the delay in occupation exceeding one year which were outside the individual’s control, the concessional deemed period of occupation is extended up to a maximum of two years.
Short delays that are not covered
In many house purchases, there is a delay of a few weeks or so between exchange of contracts and completion. It might be assumed that HMRC’s Concession D49 would cover such short delays, even if the circumstances are not explicitly covered in the wording of the concession.
However, in Revenue and Customs v Higgins  UKUT 280 (TCC) (see below), the Upper Tribunal (UT) pointed out that the circumstances in which the concession applies do not arise from a delay between exchange of contracts and completion. Thus, in strictness, there would potentially be a small restriction in PPR relief.
Happily, HMRC’s representative at the above hearing stated that this difficulty is dealt with by HMRC applying a practice whereby they ignore periods of a few weeks’ non-residence on the purchase of a PPR in the above circumstances.
Whilst HMRC’s Concession D49 and its unofficial practice on delays between exchange of contracts and completion are helpful to taxpayers, they are not part of tax law, and HMRC could withdraw them at any time.
What if the delay between owning and occupying a PPR exceeds HMRC’s 12 (or 24) month concessionary period? This may happen if (for example) an individual is buying a property ‘off plan’ (i.e. broadly before it has been built), resulting in a significant delay in an individual occupying their new PPR. These were broadly the circumstances in Higgins v Revenue and Customs.
In that case, On 2 October 2006, the taxpayer entered into a contract to lease an apartment. The work on the area that became the apartment began in November 2009. The apartment was substantially physically completed in December 2009, and the taxpayer was informed that legal completion was scheduled to occur on 5 January 2010. He occupied the apartment as his PPR from 5 January 2010. He entered into a contract for the sale of the apartment on 15 December 2011, and its sale was completed on 5 January 2012.
HMRC considered that the taxpayer’s period of ownership commenced at the date of the contract to acquire the lease of the apartment and ended at the date of the agreement to sell. Consequently, the taxpayer’s period of ownership began on 2 October 2006 and ended on 15 December 2011. However, the First-tier Tribunal (FTT) ( UKFTT 236 (TC)) held that the taxpayer’s ‘period of ownership’ (for PPR relief purposes, in TCGA 1992, ss 222 and 223) began when he owned the legal and equitable interest in the lease of the apartment and owned the legal right to occupy it. That was the date of legal completion of the purchase of the lease on 5 January 2010. The period of ownership ended on 5 January 2012, when the contract for sale was completed. HMRC appealed.
The Upper Tribunal (UT) stated that the acquisition cost and the disposal proceeds were fixed on 2 October 2006 and 15 December 2011 respectively, when unconditional contracts were exchanged. Those were also the dates of acquisition and disposal for CGT purposes (TCGA 1992, s 28). Unfortunately for the taxpayer, the UT considered that the FTT was wrong to find that the period of ownership could only begin when the taxpayer had legal title to the apartment and a legal right to occupy it. HMRC’s appeal was allowed.
Delays between exchange of contracts and completion on the acquisition of a PPR should be kept as short as possible. This may also be a sensible precaution in case the UT’s findings in Higgins cause HMRC to review its practice of allowing relief for short delays on those circumstances.
This article was first printed in Property Tax Insider in March 2019.