The decision has left taxpayer Desmond Higgins facing a capital gains tax (CGT) bill of £61,383 on the sale of his apartment, which he had bought off-plan in London in 2004 but couldn’t move into until 2010 because it didn’t exist.
The case turned on the application of principal private residence relief. This exempts a gain from CGT on the disposal of a property that was the taxpayer’s only or main residence throughout the period of ownership.
In 2004 Higgins paid a reservation deposit on an off-plan purchase of a two-bedroom flat in a development of the former St Pancras Station Hotel in central London. In 2006 he exchanged contracts to have it built and in 2007 he was granted a lease although it was still just a shell of a building.
That same year, Higgins sold his main residence (for which he was entitled to main residence relief on the disposal), intending to occupy the new flat. Construction was delayed, however, as a result of the credit crunch, and for the next three years he was forced into a nomadic life, living with his parents, travelling or staying in another flat he owned which was normally rented out.
Work finally began in November 2009 and he completed the purchase and moved in on 5 January 2010.
When he sold the flat two years later, he was then presented with a CGT assessment for £61,383 for the 2011/12 tax year. The assessment encompassed the period 2004 to 2010 when the property did not exist.
Higgins appealed to the First Tier Tribunal (FTT). He contended that the period of his ownership was coterminous with the period when the apartment was his main residence so that he was entitled to main residence relief on the whole of the capital gain accruing to him on the disposal on 2012.
The FTT agreed. It found that his period of ownership began when he owned the legal and equitable interest in the apartment lease and owned the legal right to occupy the apartment.
HMRC then appealed to the Upper Tribunal, arguing that relief should only be granted in respect of a proportion of the capital gain because the apartment was not his main residence during the whole of his period of ownership.
The tribunal ruled in HMRC’s favour, ruling that CGT was applicable throughout the whole of Higgins’ period of ownership. The two judges agreed that “HMRC’s construction was consistent with parliament’s intention of restricting relief where a dwelling has not been a main residence throughout the period during which the gain arises”.
Kingston Smith’s head of tax, Tim Stovold, says he finds the Upper Tribunal’s decision baffling. “Higgins will have to pay CGT that refers to a period of time when the property did not in fact exist – truly this is the world of ‘Alice through the Looking Glass’. This ruling does seem bereft of common sense.”
He added that the ruling was a timely warning of the dangers of buying homes before they were built. “Effectively, buying off-plan means that any gain is likely to have an investment element taxed at 28%.”
This is particularly important since the current housing shortage means that many more people may be tempted to buy homes off-plan.