Private residence relief (PPR) is the name of the tax rule which means that if you sell the property you’re living in, you don’t have to pay capital gains tax on any increase in the value of the property.
As you know, if you own additional homes (buy-to-let and holiday cottages, for example), you have to pay 18% or 28% capital gains tax on the increase in the value of your property (minus expenses) when you sell them.
What about property that you buy off-plan? The First-Tier Tribunal looked at this issue in the case of Desmond Higgins versus the Commissioners for Her Majesty’s Revenue and Customs on 1st February last year.
Off-plan property purchases and tax – Mr Higgins’ off-plan property purchase
In 2004, Mr Higgins paid £5,000 as a reservation deposit to secure a right to be granted a lease at a premium for an apartment in Kings Cross. Two years later, he entered into a contract with the developer.
The Tribunal was asked to consider whether Mr Higgins’ ownership of the property for the purpose of private residence relief started when he signed the contract in 2006 or when the property had been completed in both the physical and legal senses.
Off-plan property purchases and tax – HMRC’s opinion
HMRC believed that ownership began when he signed the contract in October 2006. Between October 2006 and January 2010, when Mr Higgins moved in, the property increased in value.
HMRC were of the opinion that Mr Higgins should pay Capital Gains Tax on the increase in the value of the property between October 2006 and January 2010 and that he should only be entitled to private residence relief during the time he occupied the flat.
Off-plan property purchases and tax – Tribunal verdict
The Tribunal disagreed. Among the main reasons for their decision were:
- In the purchase contract, Mr Higgins’ ownership of the property only commenced when the property was physically and legally completed which both he and the developer agreed was 5th January 2010.
- The court believed that Mr Higgins took up residence as soon as he was able to legally and physically and that any delay in getting to that situation was not Mr Higgins’ fault.
- It would be “perverse” to say that ownership of the property began at a time when Mr Higgins had no right to occupy his flat.
- Tax laws account for when an asset liable for CGT was “acquired” and “disposed” but that the law did not define the meaning of “period of ownership”.
The Tribunal ruled that private residence relief applied to the entire gain on the value of the property because it had been used as Mr Higgins’ sole residence from the date his legal right to occupy the flat began right up until the time he sold up.
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