A taxpayer, Desmond Higgins, paid a deposit on 2 October 2006 for an apartment which was to be constructed in the former St Pancras Station Hotel. At the date of the contract, the area which was to become the apartment was merely ‘a space in a tower’. As is usual with off-plan property purchases, Mr Higgins had no right to occupy the apartment until the sale completed.
The development was delayed by the 2008 financial crisis, and Mr Higgins did not move in until 5 January 2010 (completion). The value of the apartment had increased significantly by the time Mr Higgins came to sell it and he relied on private residence relief (PRR) to shelter the capital gain arising as he had always occupied the apartment as his main home.
HMRC claimed that Mr Higgins had not occupied the apartment throughout the period of ownership, which in its view began on 2 October 2006 (exchange) and demanded over £60,000 of capital gains tax (CGT).
In the Court of Appeal, HMRC argued that the words ‘period of ownership’, refer to the period between acquisition and disposal. For CGT purposes, the legislation confirms that, the date at which a disposal and acquisition is made is the date the contract is signed.
The challenge to this was that if HMRC’s interpretation was correct, ordinary homeowners would rarely benefit from full CGT relief due to the usual gap between exchange and completion. The court concluded that this could not have been the intention of Parliament. HMRC then attempted to argue that, in most cases, any chargeable amount would be minimal and covered by the annual exempt amount or would not be selected for enquiry by HMRC.
The judges were not convinced and found that it would be perverse to say the period of ownership begins when a contract to acquire a dwelling is signed, at which time it would be highly unusual for a purchaser to have a right to occupy. In this case the apartment did not even exist at exchange. The legislation clearly uses the term ‘period of ownership’ as opposed to referencing the dates of acquisition and disposal.
Somewhat dramatically, HMRC also claimed that if the acquisition and disposal dates did not determine the period of ownership, a person could enjoy relief for more than one property at a time. It is of course incorrect to say that this decision would lead to individuals enjoying relief on more than one property at a time on this basis because the legislation clearly states that a person can only have one main residence (although other exemptions such as the final period exemption may have that effect) .
This decision is a welcome move to address the well-known mismatch between the statutory fiction determining the date of acquisition and disposal and the period of ownership for the purposes of PRR. Assuming there are no further appeals, the rules now appear to be clear and fair for ordinary homeowners. HMRC’s guidance is currently incorrect, stating that ‘a period of ownership begins on the date you first acquired the dwelling house’. Perhaps this will be updated, and HMRC will finally admit defeat.