Off-plan purchases – will you pay tax on the sale of your home?

Published on 3 October 2018

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Why buy off-plan?

Buying a property off-plan is becoming a more popular option with the allure of being able to choose a brand new home finished to your requirements as well as the chance of getting a discount on the price.

Off-plan properties require a reservation deposit to be paid to secure your home before it has been built with the exchange of contracts often happening before the construction is complete. Unlike most property purchases, before you can move in you will need to wait for your new home to be ready to live in. This can take several months and in extreme cases even years!

Often the property begins to increase in value over this period especially when it starts to reach its completion. Depending on the area and how early the property is reserved, you may see significant capital appreciation before the property is even built.

Is this increase in value taxable?

Most individuals do not pay any tax on the increase in the value of their home due to the Principal Private Residence (PPR) Relief which exempts any gain from being taxable where the property has been lived in as the main residence.

Without this exemption, the rates of Capital Gains Tax (CGT) on a gain made on the sale of residential property are currently 18% for Basic Rate taxpayers and 28% for Higher Rate taxpayers.

In the case of an off-plan purchase, there is often a delay from when the individual legally owns their home (on the exchange of contacts) and when they are able to live in it. This could result in a period of ownership for which PPR relief cannot be claimed.

This was tested in a recent case where The Upper Tribunal sided with HMRC’s view that the taxpayer should pay CGT on the gain made on the sale of his home for the period before he moved in.

In this particular case, the taxpayer had paid a deposit to reserve the property in 2004 however issues relating to the title meant that construction was delayed for several years. The taxpayer finally moved into the property in 2010 after the building work was complete. The taxpayer lived in the property for around two years before selling it for a gain.

HMRC successfully argued that with regard to PPR Relief, the period of ownership should be taken to be from when an interest was acquired in 2006 to when it was sold in 2012. This meant that the taxpayer would only be entitled to the relief for the two years he actually lived in the property (plus the last 36 months for deemed occupation although this has now reduced to 18 months), with the gain made in the six-year period (on a pro-rata basis) whilst the property was under construction being subject to CGT. This left him with a sizeable amount of tax to pay!

So, whilst buying off-plan can sometimes be a lucrative investment, taking advantage of a lower value for a property before it is completed, watch out for an unexpected tax bill where there are lengthy delays along the way.

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