Principal private residence relief – when does your period of ownership begin?

Two recent cases on the availability of PPR relief have clarified the meaning of an individual’s “period of ownership” of a property for the purposes of the relief – in particular, when an individual’s period of ownership is deemed to begin.

PPR relief and periods of absence

Provided that the individual has lived in the property as their main home, certain periods of absence are permitted by the PPR relief rules. There are two in particular which are relevant in the context of the recent cases.

1. ESC D49
   An extra-statutory concession known as ESC D49 applies where an individual is initially unable to occupy their new home, either because they are completing the sale of their previous home, or because they are constructing or renovating their new home. In these circumstances, by concession, HMRC allow an individual to claim PPR relief for the first 12 months of ownership (with an extension to 24 months in certain circumstances) despite not having moved into the property.
   
   ESC D49 will be incorporated into the capital gains tax legislation from 6 April 2020. Arguably, the draft legislation is more generous than the existing wording of ESC D49 since it confirms that the period of permitted non-occupation (due to completing the disposal of the individual’s old home or the construction/renovation of their new home) is 24 months from the date of acquisition in all cases.
2. Final period exemption
   Under current rules, provided that a property has at some point been the individual’s only or main home, their final 18 months of ownership is always covered by PPR relief even if they no longer live in the property. HMRC refer to this as the “final period exemption”.
   
   For disposals that took place prior to 5 April 2014, the final period exemption covered the last 36 months of ownership. However, this was reduced to 18 months from 6 April 2014, and will be reduced again to nine months with effect from 6 April 2020.

For further detail about the forthcoming changes to PPR relief, see our practice note, "Principal private residence relief - changes ahead for homeowners as draft legislation is published".

The cases

White: the application of ESC D49 and the date of acquisition

The First-Tier Tax Tribunal issued its judgment in the case of White and White v HMRC [2019] UKFTT 659 TC on 30 October 2019. Mr and Mrs White had purchased four separate interests in land in London during 2001 and 2002, which they subsequently developed into a single dwelling. They moved into the house at some point between September and November 2003. When they later sold the property, they claimed PPR relief on the entire gain on the basis that ESC D49 should apply to their initial period of non-occupation.

However, HMRC did not agree and instead argued that, where a property is acquired in stages, the date of acquisition is the date on which an unconditional contract for the first parcel of land is entered into. This follows the general statutory rule for capital gains tax, which is that an acquisition is deemed to take place on the date on which the contract for acquisition is entered into (or becomes unconditional).

In this case, the contract to purchase the first parcel of land was entered into in June 2001 (with completion taking place in July 2001). Mr and Mrs White had waited more than 24 months (the maximum permitted amount of time under ESC D49) from this date before moving in. As a result, HMRC’s view was that the pre-occupation period could not be included as a period of occupation at all, and that the Whites should pay capital gains tax on the gain relating to their initial period of ownership from June 2001 to September 2003.

The Whites appealed to the First-Tier Tribunal. Although the judge expressed some sympathy for Mr and Mrs White, he concluded that the tribunal did not have any power to consider how HMRC exercised their discretion in relation to ESC D49. Given that the parties had already agreed that the circumstances of the case did not fall within the strict wording of the legislation concerning PPR relief, there was no need for the tribunal to consider the case any further.

This case serves as a reminder of the fact that extra-statutory concessions are effectively granted at HMRC’s discretion only, and have no legislative force. The incorporation of ESC D49 into the capital gains tax legislation from April 2020 will therefore be good news for taxpayers seeking to rely on it. However, given that the period between exchange of contracts (and completion) on the purchase of the first parcel of land and the moving in date exceeded 24 months, it is possible that the result in this case would have been the same.

Higgins: exchange of contracts and the date on which a “period of ownership” begins

The Court of Appeal published its judgment in Higgins v HMRC [2019] EWCA Civ 1860 on 4 November 2019. In this case, the taxpayer exchanged contracts for the purchase of a flat off-plan in St Pancras in London in 2006. Contracts were exchanged before the developer had started work, and in the end (partly due to the effect of the 2008 financial crisis) the flat was not finished until January 2010. Mr Higgins completed the purchase and moved into the flat on 5 January 2010. Prior to that date, he had no right to occupy the flat.

Mr Higgins sold the flat two years later in January 2012 and realised a significant gain. He claimed PPR relief on the gain on the basis that his period of ownership commenced on 5 January 2010 (the date of completion), and was entirely covered by the “final period exemption” (which, at the time of his disposal, was 36 months). However, HMRC assessed him to capital gains tax on the gain which had arisen since 2006, on the basis that his period of ownership commenced at exchange of contracts.

Mr Higgins challenged this successfully in the First-Tier Tribunal. The Tribunal agreed with Mr Higgins that, although the capital gains tax legislation generally treats the acquisition of a property as being the date on which contracts are exchanged, the PPR legislation refers to a period of “ownership”, and in this case the chargeable period of ownership could only be said to commence when the purchase completed.

The Upper Tax Tribunal allowed HMRC’s appeal, on the basis that the acquisition, and therefore the start of Mr Higgins’ period of ownership, occurred when contracts were exchanged. HMRC argued (and the Upper Tax Tribunal agreed) that taxable gains begin to accrue when contracts are exchanged regardless of whether the individual could occupy the property at that point.

The Court of Appeal has now reversed this decision. It agreed with the First-Tier Tribunal’s approach, noting, in particular, that if the Upper Tax Tribunal was right, few people buying a new home could benefit from full relief from capital gains tax, because exchange and completion do not normally take place on the same day. The Court of Appeal concluded that this could not have been Parliament’s intention.

On the natural meaning of the words “period of ownership”, the mere fact that someone had contracted to buy a property would not give him “ownership” of the property which would allow him to possess, occupy or use it, let alone make it his “only or main residence”. The Court of Appeal noted the statutory provision which treats exchange of contracts as the point of acquisition for capital gains tax purposes, but decided that as far as PPR relief is concerned, this provision does not dictate when an individual’s period of ownership commences.

Mr Higgins’ ownership was therefore taken to have commenced on 5 January 2010 and as a result he was permitted to claim PPR relief in full.

Concluding points

Taken together, these cases provide useful guidance for taxpayers on the application of PPR relief when considering when their period of ownership of a property commenced.

In the White case, although the First-Tier Tribunal decided that it could not rule on the exercise of HMRC’s discretion in relation to extra-statutory concessions, it was clear that, where the taxpayer has purchased a property in stages, HMRC’s approach is to treat the date on which contracts are exchanged for the purchase of the first piece of land as the date of commencement of the taxpayer’s period of ownership. It remains to be seen whether this approach will change at all in light of the Higgins case.

As set out above, in the Higgins case – which, as a Court of Appeal decision, carries significant weight – the taxpayer’s period of ownership was treated as commencing only when the purchase completed and he had a right to occupy the property. This is a helpful decision for taxpayers, particularly where there is a long period between exchange and completion of a property purchase, or where the taxpayer is buying a property off-plan. It clarifies that the general rule, i.e. that acquisition takes place on exchange of (unconditional) contracts, will not always apply in the context of PPR relief. Instead, the facts of the case will be relevant, and the taxpayer’s “period of ownership” for PPR relief purposes may commence at a later date, for example at completion.