Malcolm Finney examines the recent capital gains tax private residence relief case Higgins v Revenue and Customs.
Capital gains tax (CGT) is levied on capital gains made on disposals of property (be they by way of gift or sale) other than on inter-spouse disposals. The quantum of the gain is broadly the difference between original cost and market value on sale (with some adjustments to original cost where, for example, enhancement expenditure has been incurred on the property). Where the property sold is a private residence, the rate of CGT is 18% and/or 28%, depending upon the person’s marginal rate of income tax.
Exemption for only or main private residence
However, if the person has lived in the property throughout his/her period of ownership (or throughout this period, ignoring the last 18 months of ownership) as his/her only or main residence, then any capital gain made on disposal is exempt from CGT. If, on the other hand, at any time the residence has been let-out and/or there have been periods of absence from the property, the part of the aggregate capital gain attributable to the lettings period and periods of absence may in fact be subject to CGT.
‘Period of ownership’
Central to the core of ascertaining any charge is to understand what exactly is meant by ‘period of ownership’. It might be thought that this can hardly be rocket science but, nevertheless, this issue came before the First-tier Tribunal early in 2017.
The case was Higgins v Revenue and Customs [2017] UKFTT 0236 (TC), and Mr Higgins won.
Higgins v Revenue and Customs
At its simplest, Mr Higgins agreed to purchase an apartment ‘off-plan’ in the former St Pancras Station Hotel. On sale, HMRC accepted Mr Higgins’ contention that the apartment was his principal private residence, but argued as to the quantum of the relief because they suggested that he had not been resident there throughout his entire period of ownership; accordingly, Mr Higgins (according to HMRC) owed CGT of around £60,000.
HMRC argued that the period of ownership of the flat commenced at the date the contract to acquire the flat was entered into (commonly referred to as ‘exchange’) and ended on the date the agreement to sell was made (again, ‘exchange’). Although these are the dates used to ascertain the dates of acquisition and disposal for CGT purposes, Mr Higgins argued that these dates were not appropriate to determine his period of ownership of the flat. HMRC were, in effect, arguing that Mr Higgins entitlement to private residence relief (and hence CGT exemption) was restricted.
HMRC’s approach led to a liability to CGT, as they said Mr Higgins did not begin to live in the flat for some years after contracts for purchase were exchanged (exchange occurred in 2007 but, due to the credit crunch, the flat was not habitable until 2010), thus giving rise to a period between exchange and completion where the flat was not occupied and thus, HMRC argued, this period could not qualify for exemption from CGT.
The Tribunal disagreed with HMRC and agreed with Mr Higgins, stating that the period of ownership began when Mr Higgins owned both the legal and equitable interest in the flat and owned the legal right to occupy the flat i.e. the date of ‘completion’ (not ‘exchange’). Similarly, the period of ownership ended when the contract for sale was ‘completed’ (not ‘exchanged’).
The decision appears to accord with common sense, and it was the normally understood meaning of period of ownership that the tribunal adopted, not the artificial definition suggested by HMRC. Nevertheless, it is welcomed.
Practical Tip:
In many day-to-day cases, the matter will perhaps be immaterial. However, where there may be significant delays between exchange and completion, the tribunal has made it clear how the period of ownership is to be measured.
