David Whiscombe comments on the limits of Main Residence exemption.
Broadly, you get full exemption from tax for a capital gain on a property only if it’s been your “main residence” throughout your period of ownership. But when does the period of ownership begin if you buy off-plan?
Mr Higgins bought an apartment in the St Pancras Station Hotel development. (Thanks are notably due, and not only from Mr Higgins, to the late Sir John Betjeman, without whose efforts that Gothic extravaganza might have suffered at the hands of philistine modernists in the 1960s the same sad fate as befell the Euston Arch: but we digress.) He paid a reservation deposit to secure a particular yet-to-be-built apartment in 2004 and signed a purchase contract in 2006.
Building the apartment started in 2009 and finished at the beginning of 2010. Thereupon legal completion took place and Mr Higgins occupied the apartment as his main residence until he sold it at the end of 2011, at something over double the price he had given for it.
So, what was his “period of ownership”?
The First-tier Tribunal thought that the period began only when he completed the purchase and was physically able to occupy the apartment. The whole gain was thus exempt.
The Upper Tribunal disagreed. Essentially, it considered that the rule at Taxation of Chargeable Gains Act s28 (which says that, where something is acquired or disposed of under a contract, the acquisition or disposal is treated as taking place on the contract date) was relevant. The apartment had thus been acquired in 2006 when contracts were exchanged, and that was when the period of ownership began. Mr Higgins had occupied it as his main residence for only about a third of the period of ownership, so exemption was restricted accordingly.
As the Tribunal pointed out, “There is nothing absurd or unfair in a construction which restricts relief for off-plan purchases because in the period before the dwelling is constructed it is clearly not the taxpayer’s main residence. The gain does not arise only in respect of a period in which it is the taxpayer’s main residence but across the whole period between the date when the purchase price is fixed by the contract for acquisition and date when the sale price is fixed by the contract for disposal.”
However, most purchasers do not take up occupation until completion, which is usually a few weeks after an exchange of contracts. The effect of the Upper Tribunal decision is therefore that in most cases there should strictly be a small restriction to the relief.
When the case came before the Court of Appeal  EWCA Civ 1860 – for our purposes, Chapter 3 – the Court clearly found this consequence unsettling. So much so that they reversed the Upper Tribunal decision and restored that of the First-tier Tribunal:
‘In my view, the fact that the construction of the provisions that HMRC favour would rarely entitle ordinary home-owners to full relief from CGT strongly suggests that the construction is incorrect. The FTT said at paragraph 6(4) of its decision, “To say the period of ownership begins when a contract to acquire a dwelling is entered into, at which time it would be highly unusual for a purchaser to have a right to occupy, would be perverse in the context of providing relief to individuals for gains realised on the sale of a private principal residence.” I agree.’
One can see the strength of the argument: but it produces its own anomalies. It’s reasonable to suppose that by the time the apartment was completed in 2010 the majority of the gain had already accrued. If Mr Higgins had sold at that time without moving in, there is no question but that the whole gain would have been chargeable. That the whole gain becomes exempt simply because the property became on completion his main residence (for however short a period) is arguably no less odd than are the consequences of the Upper Tribunal decision at which the Court of Appeal baulked.
For more information, please get in touch with your usual BKL contact or use our enquiry form.