The recent case of HMRC v Higgins (2018 UKUT 280) has brought ‘principal private residence relief’ into the spotlight. It is extremely important to consider the implications of this case and the application of the relief.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. This applies to heritable assets (e.g. a house) and moveable assets (e.g. an investment like a shareholding). Disposing of an asset includes selling it, gifting it, swapping it and getting compensation for it.
You do not pay CGT on certain assets (including ISAs or PEPs). In some circumstances, principal private residence relief (PPR) may apply.
What is Principal Private Residence Relief?
You will be entitled to PPR when you dispose of your home if all of the following conditions apply:
- you have one home and you’ve lived in it as your main residence for all the time you’ve owned it;
- you haven’t let part of it out (this doesn’t include having a single lodger);
- you haven’t used part of it for business only;
- the grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total; and
- you didn’t buy it just to make a gain
If you don’t meet all these criteria you may have to pay some CGT if you sell your property.
Residence has been given the meaning “to dwell permanently or for a considerable time, to have one’s settled or usual abode, to live in or at a particular place.”
There are helpful rules that deem certain periods of ownership to be part of the qualification period for PPR, as well as not penalising certain periods of absence.
Where there are two or more potential main residences, there is need to nominate which property is to benefit from PPR. The issue of multiple properties can also arise when couples move in together or where couples separate.
Some interests in trusts will benefit from PPR and some will not.
Any individual is entitled to the relief on any gain arising on the disposal of their only or main residence (whether you own the property outright or jointly).
What happened in the HMRC v Higgins case?
The facts: Mr Higgins purchased a property in London from a developer in 2006 before the building work had started. The building was finished in January 2010, when Mr Higgins completed the purchase and moved in. Two years later he sold it and moved out. He claimed PPR for the full period of his ownership, including the 39 months between 2006 and 2010 when he had bought it but not moved in.
HMRC decided Mr Higgins was not entitled to PPR for the period before his occupation which resulted in a £61,383 CGT liability.
The result: Mr Higgins initially appealed successfully against the capital gains amount on the grounds he was entitled to full relief. This was on the basis that it was his main residence throughout his period of ownership. He did not own another property during this time.
HMRC appealed, and has now had that original ruling overturned at the Upper Tax Tribunal. They decided that CGT begins to accrue as soon as contracts are exchanged. However the PPR exemption only applies when the taxpayer is in residence.
There will be many people who purchase their property ‘off plan’. As a result of this case, it is important to consider the CGT implications if you purchase and thereafter sell your property.
Don’t lose PPR!
There are a number of issues concerning CGT and PPR, including the application of PPR if you are a non UK resident and own property in the UK. Understanding the periods deemed to qualify, allowances for periods of absence and nomination between properties can be particular vital to securing the full advantages of PPR. PPR is a valuable relief. It would be very unfortunate to lose some or all of the benefits of it due to way in which one’s affairs are structured.