The recent budget has highlighted an upcoming change in relation to the rules of Principal Private Residence (“PPR”) relief
As a result, I thought it would be a good time to provide a brief overview of the relief which has now hit the headlines and the proposed changes, which is certain to reduce the availability of this tax relief.
PPR is a relief against capital gains tax (“CGT”). At a basic level, capital gains tax is an 18% or 28% tax on chargeable gains made when an individual disposes of an asset. It compares the initial value with the value upon the present transfer (whether by sale or gift), and deducts any allowable expenses such as legitimate improvements which have been made whilst owned.
The main, and probably most widely known relief from CGT relates to an individuals principal private residence, i.e. their home.
The statutory definition of PPR is that no part of a gain on a private residence is chargeable to CGT if:
- the property is the individuals main or only residence throughout the period of ownership; and
- the residence has only been used as a home and nothing else
It is important to note, you don’t have to claim PPR, it is a relief which is given automatically however HMRC are keen to investigate any potential abuses of the rules.
Some interesting points to note in relation to PPR are:
- The PPR relief applies so long as the “land” owned with the residence concerned is less than 0.5 hectare i.e. a reasonable sized garden roughly the size of a football pitch. If the land is over that limit, the test HMRC will apply is whether that size of land is necessary for the “reasonable enjoyment” of the property. This limit effectively prevents a small property on a large amount of land from obtaining PPR over the entire combined value.
- PPR is limited if you use any part of your home for business purposes. PPR can be reduced by the percentage of your home which is used for your business.
- The property must be the individual’s main and only residence throughout the period of ownership. HMRC can investigate thoroughly the purpose of the occupation, for example if the owner is a property developer and has moved in purely to renovate the property and make an onward sale, HMRC are highly likely to refuse PPR.
- If you own more than one home, you can elect with HMRC which of your homes you nominate as your PPR, as you can only obtain PPR over one property, the other(s) therefore will be subject to CGT. You must make your nomination within 2 years of the date from which you change the number of properties you live in. You should make a new nomination whenever the number of homes you live in changes.
- PPR can in certain circumstances be claimed by Trusts which allow beneficiaries to reside in the trust property and in certain circumstances can be claimed during the administration of a deceased’s estate.
- You may still get PPR even if you did not live in the property throughout the entire period of ownership. At present the PPR relief applies automatically to the last 36 months of ownership even if you did not live there. This rule was initially introduced so that people trying to move house were not disadvantaged if they struggled to sell their property before moving into a new one. It effectively provides you with the time to sell the previous principal private residence and even if it sells quickly, PPR is still automatically available for those 36 months.
The change announced in the last budget means that the Finance Bill 2014 will reduce the final period for which relief can be given where the property is not the person’s only or main residence from 36 months to 18 months.
The policy objective is to reduce the incentive for those with more than one property to exploit the 36 month rule whilst still providing the flexibility to sell a residence whilst moving into a new one. The measure will have effect on any contracts exchanged after 6 April 2014.
There is however an important exemption which could effect some of our clients. It recognises the fact that a person who is moving into a care home may need longer to sell their home and therefore the final 36 month period will remain.
The above summary only highlights some of the complexities of this relief and professional advice should always be sought at the time of contemplating a sale of a property which is likely to result in a gain.
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