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  • Katherine Bullock

Nightmare on Elm Street: the Capital Gains Tax trap when you buy your dream home off-plan

Principle Private Residence relief (PPR) has been fundamental to Capital Gains Tax (CGT) from its inception. For many where their home may be their most valuable asset, it is critical and there is a general expectation that they will be able to sell their home free of CGT. So embedded is the idea in the minds of taxpayers that there are a lot of common misconceptions – that husband and wife can each have a PPR is the one I hear most often. However, these aside, PPR has been a stable and important corner stone of the CGT regime for private clients for many years. Its bear traps were well known and could be carefully navigated.

However, the basic tenants of PPR are currently undergoing significant revision that could fundamentally impact many homeowners and create significant uncertainty. Most recently, in this week's Autumn Budget, the Chancellor reduced the period for which relief could be claimed between ceasing to be the PPR and sale from 18 months to 9 months, whilst at the same time limiting the availability of letting relief on property that had been previously occupied by the owner. With speculation that property markets might slow with Brexit changes over the next few years, the prospect of houses being unoccupied for longer periods or let whilst a buyer is sought now runs the risk of an unexpected CGT bill.

"the basic tenants of PPR are currently undergoing significant revision that could fundamentally impact many homeowners and create significant uncertainty"

The concept of what is and isn't a "residence" together with the purpose of occupation has been subject to recent challenge, particularly where the taxpayer owns two homes, claiming one as their main residence eligible for PPR.

However, the recently reported Upper Tier Tribunal decision of Higgins has added yet another complication to the availability of PPR. Higgins considered the meaning of "period of ownership" for the purpose of PPR. This test is important in determining both whether relief is available at all and the amount of that relief. Higgins concerned an off-plan purchase of an apartment in London. Contracts were exchanged on the property, but completion took place some time later after completion of the building works. For CGT purposes, the ordinary rule is that property is acquired on exchange of contracts and not completion. The Upper Tier Tribunal (UTT) overturned the decision of the First Tier Tribunal, which had exempted the full gain on disposal of the apartment. Instead it held that the sale proceeds should be time apportioned between exchange and occupation and no PPR relief should be available for the period before completion.

The taxpayer argued that this gave an absurd result as the apartment could not be used prior to completion, but the UTT took the view that the taxpayer had had the benefit over the growth in value of the property over this period. This is clearly an alarming decision for the many people who buy their homes off plan, but it could have potential consequences for everyone who has a delay of a few weeks between exchange and completion. Although not set out in HMRC's guidance manuals, HMRC said that they applied common sense and disregarded this period. But can that assurance be relied on? How long is a "few weeks"?

And there is a further practical difficulty. There isn't a requirement to file CGT summary pages as part of your self-assessment tax return on the disposal of your main home if the disposal qualifies for PPR in full. Should taxpayers now return the disposal of their main residence because of a gap between exchange and completion? Or do they rely on HMRC's unpublished statement of practice and run the gauntlet of increased penalties for a failure to return the disposal?


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