Jennifer Adams considers the importance of 'period of ownership' and 'occupation' in relation to a capital gains tax principal private residence relief claim.
Principal private residence (PPR) relief is one of the most important and familiar of reliefs against a capital gains tax (CGT) charge on the sale of a residence.
However, as is often the case with tax matters, this relief is not straightforward and comes with a set of conditions.
Lacking definitions
The relevant section of the Taxation of Chargeable Gains Act (TCGA) 1992 is s 222(1)(a), where PPR relief exempts a capital gain arising on a disposal of, or of an interest in:
‘(a) a dwelling house or part of a dwelling house which is, or has at any time in his period of ownership, been his only or main residence; or
(b) land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area.’
It is easy to overlook the phrase 'period of ownership' and focus instead on 'at any time' and 'only or main residence,' leading to the assumption that PPR relief automatically applies – but when do 'ownership' and 'occupation' begin?
Notably, the legislation refrains from providing definitions; therefore, we must refer to HMRC guidance and tax case law for clarity.
'Period of ownership'
Generally speaking, the 'period of ownership' refers to the time during which the individual legally owns the property, starting from the date the property was initially acquired (usually the date of completion of the contract or 31 March 1982, if later), ending at the date of disposal.
The Upper Tribunal case HMRC v Lee [2023] UKUT 242 (TCC) illustrates this point. The case centred upon HMRC’s argument that a dwelling house cannot be owned separately from the ground upon which it stands, meaning that the period of ownership must include the entire duration of ownership of the land.
The facts in Lee were that the taxpayers had bought a property with land, demolished the house and spent two and a half years building a new one. They moved in and lived there for just over a year before selling, claiming full PPR relief on the gain made. The taxpayers argued that full PPR relief was available because the expression ‘period of ownership’ referred to the time they owned the new house. The critical period for them was the 15 months between the completion of the new house and the date of sale. Therefore, under the PPR relief rules at the time, this period would qualify for the final exemption of 18 months (this statutory period was subsequently reduced to nine months).
HMRC argued that the taxpayers had effectively owned the property for 43 months, from the date of acquisition of the land to the date of sale of the house, calculating that PRR would be available for 18/43rds of the gain due to the 18-month final period exemption.
The tribunal disagreed with HMRC's view, upholding the First-tier Tribunal’s decision that the section of TCGA 1992 referred to a 'dwelling house' and therefore the start date for PPR relief was the date that the construction work on the property was completed. Although the house existed for a quarter of the time the land had been owned, the 'period of ownership' test related to the house only.
Planning opportunities
This ruling seemingly presents a valuable tax planning opportunity. It implies that a taxpayer could strategically purchase a plot of land with the intention of obtaining planning permission to build a larger house, or they could opt to acquire a smaller residence with the plan of demolishing and constructing a more substantial dwelling. Although obtaining planning permission can take years, once granted, the value of the land or property would undoubtedly increase. This case indicates that even if land remains vacant for an extended period prior to the construction of a house, once it becomes occupied as the PPR, the seller may be eligible for full PPR relief, even if the structure was present for a short period before the sale.
Another planning opportunity could arise where an owner lives in their main residence while constructing a new property within the garden. Any gain on the sale of the original house would qualify for full PPR relief as the main residence, and any gain on the future sale of the new property could also be fully exempted if it was occupied for the full period of ownership (starting on the contract completion date or date of occupation, not when the original land was acquired).
Furthermore, the Court of Appeal has confirmed that the date of acquisition of an off-plan property for PPR relief purposes is the date of completion and not at exchange of contracts (Higgins v HMRC [2019] EWCA Civ 1860).
'Occupation'
To qualify for PPR relief, the owner must have occupied the property as their main home during the period owned. 'Occupation' refers to actual physical residence (i.e., the period during which the owner genuinely lived in the property as their main home). Those periods of occupation will be covered automatically under a PPR relief claim. However, there are some periods when actual presence in the residence is not possible but which can still qualify if certain conditions are met (e.g., working away or a delay in moving in due to refurbishment).
Additionally, the period of non-occupation between buying the property and moving in can also be treated as a period of occupation, limited to a 24-month period on the condition that no other person uses the property as their residence during that time. Problems can arise when there is a delay in taking up residence or when the taxpayer already owns the land on which a house is to be built or buys a plot specifically to do so. A typical situation can arise when properties are being developed, not least because sometimes the development takes longer than 24 months through no fault of the owner. Therefore, the date of 'occupation' needs to be considered carefully.
The case White & Anor v HMRC [2019] UKFTT 659 (TC) centred around the 24-month rule (as an extra-statutory concession), highlighting the difficulty in determining when ownership starts and, therefore, from when the clock starts ticking. In that case, HMRC considered the date of acquisition of a property acquired in stages commenced from the time of entering into an unconditional contract for the first part of the property acquired.
The taxpayers bought four adjacent properties to convert into one residence. The first property was purchased in June 2001 and the final one in April 2002. There was a dispute around the date of taking up residence – somewhere between September and November 2003. On the eventual sale, HMRC challenged the PPR relief claim, going for the date of exchange of contracts of the first property as the start date. Depending on when occupation was held to begin, the delay was 27 or 29 months. This meant the existing concession for delayed occupation could not apply and more than two years of the ownership period was chargeable.
The importance of records
HMRC is known to look carefully at developments for residential property undertaken by builders who then claim PPR on sale.
A typical example is Ives v HMRC (2023) UKFTT 968 (TC), where in a period of five years, the taxpayer (a plasterer) bought and sold three properties at a substantial gain following work undertaken to each property. HMRC argued he was trading as a property developer, but the First-tier Tribunal disagreed, allowing a PPR relief claim to succeed. Reading the judgement, it is clear the courts require a great deal of background information when making their decisions. In this case, the court looked at whether contents insurance had been taken out in each case (it had not), although it was confirmed that furniture had been moved. Witness statements were presented from 20 family and friends asserting that they visited the properties for parties (which would not have been possible in a non-habitable property), water and electric bills were produced, evidence taken from estate agents, pictures printed from Zoom, whether addresses had been changed for such items as a driving licence, car insurance, the doctor and milkman.
Ultimately, the court determined that 'on the balance of probabilities' the taxpayer intended each property to be his main residence, despite relatively short-term occupancy due to changing family circumstances.
Practical tip
Mr Ives could be seen as fortunate in winning his case, possibly because HMRC's presentation of the case had flaws. However, the case does indicate HMRC's area of interest and the importance of keeping documents to support any PPR relief claim.
