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Markel Tax

06 Nov 2019

When is a home exempt from CGT?

When you sell a property and make profit, that capital gain will be subject to capital gains tax (CGT), unless there is a specific relief or exemption which fits the conditions of the sale exactly.  
 
A well-known relief is for gains made on the disposal of the taxpayer’s main home (aka principle private residence: PPR), but it is widely misunderstood.
 
For the gain on selling a home to be fully relieved from CGT, the taxpayer must occupy the home as their only or main residence throughout their period of ownership. This means we need to determine the exact dates of:
  • the period of ownership; and
  • the period, or periods, of occupation

Where both of the periods above coincide, the gain attributed to that period will be exempt from CGT.
 
Periods of deemed occupation can apply when the taxpayer is not actually using the property as their main home, such as when they occupy another property as work-related accommodation, or they have nominated their home as their main residence if they live concurrently in two or more properties. The actual occupation must also have a quality about it which indicates the taxpayer intended to occupy the home as their main residence with a degree of permanence.
 
The period of ownership should be easy to determine from the contracts for sale and purchase of the property. Unfortunately, it’s not that simple.    
 
For CGT purposes, the period of ownership to calculate the gain made from any asset, starts when the contract to purchase is made (TGCA 1992, s 28). For land or buildings, this point is generally when the contracts are exchanged, rather than when the date on which the contracts are completed, which could be some months or years later. This can cause a problem, which was illustrated by D Higgins v HMRC [2019] EWCA Civ 1860
 
Higgins entered into a contract to buy his £575,000 flat ’off plan’ on 2 October 2006. However, the flat wasn’t ready for occupation until 5 January 2010, and he didn’t have the right under the purchase contract to occupy it before that date, which was the completion date of that contract.
 
He exchanged contracts to sell the flat on 15 December 2011, and moved out on 5 January 2012.
 
The question to be decided was: Did Higgins’ period of ownership start on 2 October 2006 or on 5 January 2010 when he acquired the legal right to occupy the apartment?
 
If the earlier date was the start of his ownership period, the gain accrued for that 39-month period, to 5 January 2010, could not be covered by the main residence exemption as he was not also in occupation for that time. As HMRC assume that a gain accrues on an even basis throughout the ownership period, Higgins was exposed to tax on a gain of £61,383.
 
The First-tier Tax Tribunal (FTT) concluded that the ownership period commenced on 5 January 2010 when he “owned the legal and equitable interest in the lease of the apartment and owned the legal right to occupy the apartment.” HMRC appealed that decision.
 
The Upper-tier Tax Tribunal decided that his ownership period ran from 2 October 2006 to 15 December 2015, which were the dates on which he signed the contracts to buy and later to sell. This would have big implications for anyone who bought an off-plan property that could not be physically occupied for some time.
 
The Court of Appeal has now decided in favour of Higgins. The four judges ruled that that TCGA 1992, s 28 does not have to dictate the period of ownership for the main residence relief.
 
Justice Newey commented that it was “hard to see how Mr Higgins' ‘period of ownership’ of the apartment could have begun before late 2009. When contracts were exchanged in 2006, the apartment was just a ‘space in the tower’.
 
The judges unanimously agreed that the decision reached by the FTT that Higgins’ period of ownership began when his legal right to occupy commenced. Thus, the full gain was covered by the main residence relief.  

For further information, please contact the TaxDesk on 0845 4900 509.

Tagged Tax for entrepreneurs and corporates
Next article in series

05 Nov 2019

A Guide to Enterprise Management Incentives (‘EMI’) Schemes