What is the tax position if you are selling a second home or have worked abroad for a prolonged period? What if it is a large property with considerable grounds or you have been running a business from home? These are just some of the factors which can affect your entitlement to Principal Private Residence relief (PPR), which (if available) can reduce or eliminate the capital gains tax (CGT) liability on disposal of your house.
Relief from CGT is given on the sale of a “dwelling house” where at some point this has been your only or main residence. There is no prescribed time limit to determine at what point the property becomes a residence: HM Revenue and Customs (HMRC) will look at the “quality” of residence rather than the period of ownership to determine whether the property has genuinely been lived in as a home, or was purchased simply to realise a gain.
PPR also extends to the grounds of the property, limited to 0.5 hectare (or more where a larger area is required for the reasonable enjoyment of the property). HMRC may also accept a claim for PPR on other buildings forming part of an estate where they are within the “main curtilage" of the house and have a clear relationship with one another.
Periods of absence
Where there have been periods of non-occupation of the property, only a proportion of the relief may be allowed. However in some circumstances it is possible for periods of absence to be ignored, these are:
- Any absence of up to three years
- Absence of any period when working abroad
- Absence of up to four years when the requirements of employment meant that it was not possible to live in the house
In addition to this, HMRC allows relief in the final 18 months (previously 36 months, prior to 6 April 2014) of ownership, regardless of whether the property was occupied.
Individuals and married couples/civil partners living together can only claim PPR on one residence, with the exception of the final 18 months of ownership as mentioned above. Where there are two or more “homes”, it is possible to make an election to choose which property will be the main residence. Typically this would be the property expected to have the highest increase in value.
Divorce and separation
This is never an easy time for those concerned but it is essential that the timing of any transfer of property is considered carefully during the process to avoid any unexpected tax charges. Where one spouse leaves the marital home and, as part of the settlement, his or her share is transferred to the spouse still living in the property, PPR will be available up to the date of transfer. However this may not always be advantageous depending on whether a new property has been purchased or where there is more than one property to consider.
Relief for let property
Where a property has been let at some point, and has also been the main residence, relief is extended to cover the proportion of gain relating to the period the property was let, up to a maximum of £40,000.
Working from home
Using your home for business can also affect the relief available. The impact on PPR will depend on the circumstances. If the property has a purpose built office or workshop that is exclusively used for business, then when the property is sold the proportion of the gain relating to this part will not qualify for relief.
If on the other hand the property has a study or a spare bedroom that is used as an office but is also used by other members of the family from time to time, this should not affect the exemption.
Property in trust
PPR is also available for properties held in trust where the trustees allow a beneficiary to live in such a property as their main home However, care does need to be taken to ascertain whether a claim for “gift holdover relief” was made when property was settled into trust, as this may mean PPR is not available.
Crowe Clark Whitehill