Capital gains tax – Main residence relief – Off-plan purchase – Period of ownership – Respondent claiming main residence relief on sale of apartment – Appellant commissioners raising capital gains tax assessment – First-tier tribunal allowing respondent’s appeal – Appellants appealing – Whether period of ownership determined by reference to date of completion or date of exchange of contracts – Appeal allowed
In 2004, the respondent decided to purchase an apartment “off-plan” in a development of the former St Pancras Station Hotel in central London. He paid a reservation deposit of £5,000 to secure a two-bedroom apartment. On 2 October 2006, the respondent entered into a contract with the seller. The purchase price was £575,000. The reservation deposit was treated as part of a 10% deposit payable on or before 2 October 2006. A further 10% deposit was payable on 1 March 2007. Construction work began in November 2009 and it was substantially physically completed in December 2009. Completion took place on 5 January 2010. Thereafter, the respondent occupied the apartment as his main residence until he entered into a contract for sale on 15 December 2011 which was completed on 5 January 2012 at a sale price of £1,215,000. The respondent occupied the apartment as his main residence from 5 January 2010 to 5 January 2012. From July 2007 until January 2010 his residential arrangements varied but no other dwelling was regarded as his main residence throughout that period.
The respondent claimed entitlement to full main residence relief from capital gains tax on his disposal of the apartment in 2011-12 on the basis that it was his main residence throughout his period of ownership. There was no explicit definition of the period of ownership for the purposes of the relief under sections 222 and 223 of the Taxation of Chargeable Gains Act 1992. It was common ground that in the period prior to 5 January 2010 the apartment was not his main residence as it did not exist as such. The respondent contended that the relevant period of ownership started on 5 January 2010 when he was first able to occupy the apartment and finished on 5 January 2012 when he completed the disposal and ceased occupying the apartment.
The First-tier Tribunal (FTT) allowed an appeal by the respondent against a closure notice assessing him to capital gains tax (CGT) of £61,383 for tax year 2011-12. The appellant commissioners appealed. Relying on section 28 of the 1992 Act, the appellants contended that the “period of ownership” was the period between the date of acquisition and the date of disposal. That period commenced on 2 October 2006 when the respondent contracted to purchase the apartment and ended on 15 December 2011 when he contracted to sell it. The appellants contended that section 223(2) applied because only a fraction of the gain accruing on the sale was entitled to main residence relief, that fraction representing the proportion that the period 5 January 2010 to 15 December 2011 (when the apartment was his main residence) bore to the period of ownership (between 2 October 2006 and 15 December 2011).
Held: The appeal was allowed.
(1) The FTT had been wrong to find that the period of ownership could only begin when the respondent had legal title to the apartment and a legal right to occupy it. The length of the period of ownership was governed by section 28 of the Taxation of Chargeable Gains Act 1992 which provided that where an asset was disposed of and acquired under an unconditional contract, the date of disposal and acquisition was the date the contract was made and not the date of conveyance of the asset. Accordingly, for the purposes of calculating main residence relief, the period of ownership was from the date of exchange of contracts for the purchase of the property until the date of exchange of contracts for the sale. As the respondent had occupied the apartment only for a proportion of the time that he had owned it, he was entitled only to a proportion of the relief.
(2) Main residence relief did not simply exempt any gain on the disposal of a dwelling-house. Where the asset had not been the taxpayer’s main residence throughout the period of ownership, relief only extended to a proportion of the gain. If a dwelling house was not occupied as a main residence throughout the period of ownership, then the relief was cut back. A proportion of the gain which was referable to a period when the asset was owned by the taxpayer but not occupied as the taxpayer’s main residence did not qualify for relief. The broad purpose of the restriction was to limit relief to that part of the gain on disposal of a dwelling-house which accrued whilst the dwelling house was occupied as a main residence.
(3) 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. Those were also the dates of acquisition and disposal for capital gains tax purposes by virtue of section 28. The gain which was potentially taxable accrued over that period and the respondent enjoyed the benefit of the increase in value of his asset over that period. However, the asset was not the respondent’s main residence prior to 5 January 2010. The purpose of section 223 was to restrict the gain pro rata where the asset was not the taxpayer’s main residence for the whole of the period over which the gain accrued. There was nothing absurd or unfair in a construction which restricted relief for off-plan purchases because in the period before the dwelling was constructed it was clearly not the taxpayer’s main residence. The gain did not arise only in respect of a period in which it was the taxpayer’s main residence but across the whole period between the date when the purchase price was fixed by the contract for acquisition and date when the sale price was fixed by the contract for disposal.
Christopher Stone (instructed by Solicitor to HM Revenue and Customs) appeared for the appellant; Michael Thomas (instructed by Fieldfisher LLP) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read transcript: Commissioners of HM Revenue and Customs v Higgins
