The Principal private residence – Higgins and other PPR fallout
The well-known relief from CGT – ‘main residence relief’ or ‘principal private residence relief’ – has enjoyed, or perhaps suffered, a raised profile in recent years.
There are two reasons for this. First, the considerable number of Tribunal cases on the relief, which started coming through from 2013. And second, the legislative tightening up of the relief from April 2014, which remains ongoing (in draft Finance Bill clauses, expected to take effect from April 2020).
An important, and current case on the relief, is Higgins. This case has had its twists and turns, the Court of Appeal delivering judgment in November 2019 (Higgins v R & C Commrs  BTC 29).
This article concentrates in the main on Higgins, and includes a related Case study dovetailing with the pending legislative changes. But first, it sets out a suggested summary of where entitlement to PPR relief stands following the plethora of Tribunal cases, and then briefly rehearses the legislative changes (and main pending changes).
Where have the Tribunal cases (from 2013) taken us?
The basic legislative rule is well-known: for principal private residence (PPR) relief to be available to any extent, the dwelling in question must have been the taxpayerʼs ‘only or main residence’ during some part of their period of ownership.
A leading case for this purpose is the Court of Appealʼs judgment in Goodwin v Curtis (HM Inspector of Taxes)  BTC 176. Taking its lead from Fox v Stirk (1970) 2 QB 463, the Court there explained that the quality of the taxpayerʼs occupation must, to justify its description as a ‘residence’, have a sufficient degree of permanence, continuity or expectation of continuity.
The Tribunal cases on ‘residence’ from 2013 on, taken together, arguably drove home the following:
•The importance of the language drawn out in Goodwin v Curtis (‘… some degree of permanence, some degree of continuity or some expectation of continuity’).
•The burden is firmly on the taxpayer to provide evidence that the test is met.
•That evidence is, or may be, a mix as to actual occupation of the property, and of intention.
•A very short period of occupation may not necessarily be fatal (Morgan  TC 02596), provided the relevant intention (to make as a sufficiently permanent home) is present and only cut short unexpectedly.
•The longer the occupation the stronger the case should invariably become (and ‘intention’ begins to take care of itself) – but there can be no ‘minimum’ period that necessarily gets one ‘over the line’, and note some of the Tribunal cases involved nine or ten monthsʼ occupation but the taxpayers failed on their particular facts.
What are the legislative changes to PPR relief (from April 2014)?
The changes, and pending changes, comprise:
(1)for disposals on or after 6 April 2014: the reduction to 18 months, from 36 months, in the length of the so-called ‘final period exemption’. Note that this reduction did not apply to cases governed by TCGA 1992, s. 225E (Disposals by disabled persons or persons in care homes, etc.), where the final period exemption remains 36 months.
(2)for disposals on or after 6 April 2015: the ability for non-residents disposing of UK residential property to give notice – in the return they make reporting the disposal – to determine which of two or more residences is to be their main residence within their period of ownership of the UK dwelling (TCGA 1992, s. 222A). This obviously coincided with introduction of non-residentsʼ CGT on UK residential property disposals (which itself only captures gains accruing from a base date of 5 April 2015 (and so not prior historic gains)). In fact, non-resident individuals have always been able to make an election as between two residences, in the normal way (pursuant to s. 222(5)), though probably true to say that in many cases prior to April 2015 this was seen to be irrelevant. Note that a s. 222A notice can vary a prior election under s. 222(5), except where the prior election has determined whether any residence previously disposed of was the individualʼs main residence. Against this, a dwelling cannot be treated as a residence at all, during periods which are ‘non-qualifying tax years’ (s. 222B).
(3)For disposals on or after 6 April 2020: a July 2019 HMRC Policy paper confirmed a number of changes (first announced at Budget 2018) to PPR relief, including:
(a)a further reduction, to 9 months from 18 months, in the final period exemption (but again, without disturbing the 36 months rule in s. 225E);
(b)a restriction to ‘lettings relief’: limiting this relief (which can exempt up to a maximum £40,000 gains) so that it only applies in circumstances where the owner of the dwelling is in ‘shared occupancy’ with the tenant;
(c)a tightening up of the rules concerning transfers between spouses or civil partners: so that where an individual transfers an interest in a dwelling to their spouse or civil partner, the transferee will – in all cases, and not just (as under the current rule) where the dwelling is the only or main residence of the transferor – inherit the transferring spouseʼs or civil partnerʼs ‘period of ownership’ and previous history of use of that property. Note that the existing rules will continue to apply where the transfer is made prior to 6 April 2020, notwithstanding a subsequent disposal by the transferee is made after that date;
(d)an extension of the period in which a dwelling counts as an individualʼs only or main residence: this will be back to the date of acquisition, where the individual occupies the dwelling as their only or main residence within two years from such acquisition, provided in the meantime either: (i) the property has been the subject of construction, renovation, redecoration or alteration; or (ii) the individual has disposed of another property that was (immediately before such disposal) their only or main residence (this effectively enacts Extra-Statutory Concession ESC D49). The rule will not apply if during such period the dwelling is anyone elseʼs residence.
This Policy paper was followed up with draft Finance Bill 2019–20 clauses; these changes of course remain to be enacted.
Court of Appeal judgment in Higgins
By way of reminder, Mr Higgins had originally succeeded before the First-tier Tribunal (Higgins  TC 05724). This was reversed by the Upper Tribunal (R & C Commrs v Higgins  BTC 523). In Higgins:
•the contract for purchase of a flat was made in October 2006 – at which time the ‘flat’ was simply identified on development plans for the conversion of a former hotel, and did not exist as such (a so-called ‘off-plan purchase’);
•completion of the purchase took place in January 2010 (the construction work was delayed due to funding difficulties for the developer, post-the 2008 financial crash);
•the taxpayer moved in to his new flat on completion and lived there as his only residence until he sold the flat in January 2012 (having exchanged contracts for such sale in December 2011).
On the basis that the taxpayerʼs total ‘period of ownership’ ran – as a result of the interaction of TCGA 1992, s. 28 with the PPR legislation, as argued by HMRC – from October 2006 (contract to acquire) to December 2011 (contract to sell), and he only took up residence in January 2010, the Upper Tribunal had held that only approximately two-fifths of his total gains arising on sale were exempt by PPR relief. The taxpayer had argued his total ‘period of ownership’ ran from ‘completion to completion’ (January 2010 to January 2012), during all of which time he occupied as his only residence.
The Court of Appeal (Higgins v R & C Commrs  BTC 29), overturning the Upper Tribunal, held the ‘period of ownership’ for PPR purposes began when the purchase was completed. The Court:
•began by highlighting the ‘striking fact’ that HMRCʼs interpretation would mean very few people would qualify for PPR relief in full because exchange and completion did not normally take place on the same day. The Court did not accept HMRCʼs arguments that this anomaly was effectively remedied by the fact that frequently only small liabilities would arise and that in practice short delays are ignored;
•said that HMRCʼs interpretation of the expression ‘period of ownership’ also ran counter to the ordinary meaning of the words. A purchaser would, as a matter of ordinary language, only be described as the owner post-completion. Moreover, it was hard to see how ownership could have commenced before completion of building work, as the apartment did not then exist (and this could, in the Courtʼs view, be distinguished between purchase of a plot of land and subsequent construction of a dwelling, catered for by ESC 49, as in that case the land existed throughout);
•said there was no provision specifically applying s. 28 to PPR relief and, moreover, applying s. 28 would mean that the very individuals that it was presumed Parliament intended to benefit by introducing the relief would not qualify for full relief;
•agreed with the Upper Tribunal that TCGA 1992, s. 222(7) did not assist in the definition of period of ownership as it was directed at situations where a successive interest is acquired (e.g. leasehold then freehold);
•did not agree that the taxpayerʼs interpretation could enable individuals to obtain relief for more than one property at the same time, as the legislation made clear that a person cannot claim to have more than one main residence at any one time (for example, s. 222(5)).
We must wait to see whether this case proceeds to the Supreme Court. In this regard, it is interesting to try and break down the Court of Appealʼs approach, perhaps one might see it along these lines:
•The Courtʼs judgment is in some respects a rather impressionistic one. Arguably, what persuaded the Court above all else was the idea that, if HMRCʼs argument was correct, then almost no taxpayer would ever be entitled to full relief from gains: such an extraordinary result, the Court felt, that it could never have been intended by Parliament.
•The Court of course made the important point – which must be right (in the vast majority of cases anyway) – that the ordinary meaning of the words ‘period of ownership’ must be to the period from ‘completion (of purchase) to completion (of sale)’. But when the Court drilled down a bit further into the structure or language of the PPR legislation, the importance it attached to the argument that there was ‘no provision specifically applying s. 28 to PPR relief’, and its acceptance that s. 222(7) did not assist at all because ‘directed at situations where a successive interest is acquired’, seem less persuasive.
•As a general point, if itʼs true that the Court of Appeal (and Supreme Court too) are more open to taking an impressionistic approach, that may not be surprising. The judges in these higher courts are generally not tax specialists, in contrast to the Tribunal judges, who these days are steeped in the tax code in all its detail, through long years of professional practice.
This view above is not a criticism of the Court of Appeal. Some might say an impressionistic approach equates to the required ‘purposive construction’. And in any event, in finding for the taxpayer (as of course the First-tier Tribunal did too), the Court of Appeal, it is suggested, took the PPR legislation in context and arrived at the right answer.
In truth, one is perhaps more left to wonder why HMRC took the case. HMRC argued in its submissions to the Court of Appeal that to find for the taxpayer could facilitate abuse, suggesting the date of completion of acquisition of a property could be manipulated to such end. However, if ‘period of ownership’ for PPR relief is instead fixed by s. 28, maybe it is that which could more likely facilitate taxpayers taking advantage of the rules. This leads us into the following Case study …
Individual ‘X’ purchased a London apartment for £700,000, both exchanging contracts and completing her purchase, in January 2018. X has lived in her apartment (as her sole residence) throughout. She now plans to buy another property, which she intends to move into as her new sole residence. She expects to exchange contracts to purchase her new property in January 2020.
X however wishes to keep her current apartment, now valued at £750,000, because she judges London property market values will grow strongly over the next couple of years or so. Her plan therefore is to rent out the apartment, and then to sell in 2022 or 2023.
Xʼs tax advisers alert X to the anticipated legislative changes to PPR relief, for disposals from April 2020. In particular, if these changes go ahead, then on a sale in 2022, lettings relief wonʼt help at all, and the benefit or ‘value’ to X of the new ‘final 9 months’ rule will be much less than under the current 18 months rule. Xʼs advisers put to X the possibility of seeking a buyer to purchase the property as an investment (her apartment is the ideal ‘buy-to-let’), who is prepared to exchange contracts now but defer completion of the purchase for two years.
The property is marketed through agents, and X successfully strikes a deal with a third party (unconnected) property investor, ‘Y’:
•to sell the apartment to Y, with completion on the date two years from exchange of contracts;
•for a consideration of £900,000 but subject to adjustment down to ‘market value’ of the apartment as at Completion, if less than £900,000 (such market value to be determined by an independent surveyor, if the parties cannot agree);
•Y to pay a 5% deposit (based on the agreed current value) to X on exchange of contracts;
•Y acknowledges that X is free to let out the property in the interim, but must give vacant possession to Y on Completion, unless agreed otherwise.
The attraction of the deal to Y is that the sale will complete based on the then market value, but with a price cap of £900,000 in any event; if growth in property values really is strong, a purchase in 2022 at that maximum price will provide Y with a financial gain. The attraction to X is that a ‘disposal’ (by exchange of contracts) prior to 6 April 2020 should ‘lock in’ the current lettings relief and final 18 months rule (and if HMRC have in the meantime taken Higgins to the Supreme Court and won, X may be better off still based on what would be her residence of the apartment throughout her ‘period of ownership’ running (per s. 28) up to exchange of contracts only).
Accordingly, in January 2020, X contracts with Y to sell the apartment on the above terms; on the same day she contracts to purchase her new property. In early March 2020, X completes the purchase of her new property, and very shortly thereafter she moves out of the apartment and into the new property, which becomes her new sole residence. X (as her contract with Y so allows) then quickly lets her apartment to a tenant, for an 18-month term.
In January 2022, Xʼs tenant having vacated, the sale to Y completes. The parties agree the market value of the apartment at that time, and therefore the final contract price, at £890,000 (and there is no need for the surveyorʼs involvement).
CGT analysis based on HMRC argument in Higgins:
Based on HMRCʼs argument, Xʼs ‘period of ownership’ of the apartment for PPR purposes would run from January 2018 to January 2020 only; during the whole of such time – save for the very brief period between exchange of contracts and completion of her purchase in January 2018 – the apartment was Xʼs sole residence. Accordingly, Xʼs gains on sale, which are, before costs, some £190,000 (sale price to Y £890,000 less acquisition cost of £700,000), are all (or virtually all) CGT exempt by virtue of PPR relief. This is notwithstanding that much of the gain has accrued during the period when the apartment was let (from March 2020) and not occupied as Xʼs residence at all.
In the meantime, Xʼs new property, acquired in 2020, has also gained value in the period to January 2022. Most of this gain (save for the two/three months January – March 2020, which – per HMRCʼs argument in Higgins – counts as part of Xʼs period of ownership but is not a time when occupied as a residence) will also be covered by PPR relief, upon any eventual sale of the same.
Note 1: If, on the other hand, the Court of Appealʼs judgment is or becomes final (so that Xʼs ‘period of ownership’ of the apartment runs through to January 2022), X could expect to enjoy full lettings relief, and the 18 months final period exemption: and so it is true, with the benefit of current legislation, is perhaps no worse off.
However, this ‘equivalent outcome’ rapidly changes if one was looking instead at X disposing of property (by exchange of contracts) after 5 April 2020 – assuming the pending legislative changes are indeed enacted. In such circumstances, X could be significantly worse off if her ‘period of ownership’ ran through to ‘completion of sale’. X would prefer if HMRCʼs argument in Higgins on the effect of s. 28 won out; because it seems taxpayers might then be able to take advantage of the PPR rules, for example in similar manner to that envisaged in this Case study, to effectively secure the benefit of PPR relief on two properties concurrently.
Note 2: The stamp duty land tax rules concerning higher rates of charge for ‘additional dwellings’, including the relief from charge for a ‘replacement only or main residence’, need to be borne in mind.
The Tribunal cases from 2013, and the further reduction in the final period exemption and restriction of letting relief (assuming enacted from April 2020), have certainly resulted, and will result, in boosting CGT collections from residential property disposals.
Against this still-changing PPR relief landscape, the Higgins case seems to be an important one.
By Mark Cawthron