The Court of Appeal has recently provided a judgment in a case which was concerning the questions of when the “period of ownership” begins for tax purposes.

Background

The point that ownership begins is of interest in relation to tax as the capital gain on an asset is charged based on the difference in price between when the asset is acquired (ownership begins) and when it is disposed of (sold). Further, properties that are used as a person’s house qualify for tax relief (“principal private residence” relief or “PPR”).

However, that relief only applies during the period a person both owns and occupies a property. Ownership without occupation does not qualify. Accordingly, a long period of ownership without occupation may result in a charge to Capital Gains Tax on sale.

In the case of Higgins v HMRC 2019, the Court of Appeal were deciding on the issue of ownership as Mr Higgins had exchanged contracts and paid a deposit on an off-plan purchase of a flat in London in 2006. However, the purchase did not complete until January 2010 due to a delay in the development works. Between 2006 and 2010, Mr Higgins had no right to occupy the flat.

Selling the lease in December 2011, Mr Higgins made a significant profit. HMRC charged £61,383 in capital gains tax, based on the increase in value of the flat between acquisition and disposal.

The challenges raised

Mr Higgins challenged the HMRC on the basis that his ownership of the property did not commence until the purchase was complete and he had the right to occupy the property in 2010 and therefore the acquisition occurred then. He also claimed that he would qualify for PPR relief for the entire period of ownership.  

In the first instance, the First-tier Tax Tribunal agreed with him, however the decision was then overturned in the Upper Tax Tribunal (UTT). Paragraph 40 of the UTT’s judgment states:

"In simple terms, the gain realised on a disposal is the difference between the acquisition cost and the disposal proceeds. Those figures are determined when unconditional contracts for the purchase and sale are exchanged. In the present case, the acquisition cost and the disposal proceeds were fixed on 2 October 2006 and 15 December 2011 respectively when unconditional contracts were exchanged.”

However, it was held that he would only qualify for PPR from the period when the flat became his main residence (2010). 

Mr Higgins went on to win his appeal case on the point of when the period of ownership began. In the Court of Appeal judgment, Lord Justice Newey pointed out in paragraph 21 of his judgment that the expression “period of ownership…would not naturally, I think, be taken to extend to the interval between contract and completion. A purchaser would, as a matter of ordinary language, be described as "owner" only once the purchase had been completed.”

What are the practical implications?

The case highlights the possible discrepancies that can arise when determining a “period of ownership”. In the Court of Appeal, they referred to the fact that it is rare for exchange and completion of a property purchase to take place on the same day. The usual rule for the date of disposal of the property is that it takes place on exchange of contracts, which is inconsistent with the decision in Higgins. For taxpayers, where there is a significant impact on the amount of tax charged, this case highlights that it may be worth challenging HMRC.   

Next Steps

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