The recent case of Higgins v HMRC  EWCA (Civ) 1860 highlights one aspect of the limitations of the application of principal private residence relief (PPR) in relation to potential capital gains tax (CGT) when selling a property.
In that case the Court of Appeal ruled that PPR applies from the date of completing a property purchase (the date occupation can commence) and not the earlier date of exchange of contracts. This had a significant impact on the CGT liability of the tax payer in question. He had contracted to purchase a flat off plan from a developer in 2006 when the flat had not yet been built. He was permitted to occupy the flat in 2010 when he completed the purchase. He sold the flat in 2012 claiming PPR on his entire gain, which had been denied for the period post exchange of contracts, but pre-completion of the purchase. HMRC argued that “ownership” for capital gains tax purposes began when exchange took place and as the property had not been the main residence between exchange and completion, PPR was unavailable. The Court of Appeal, however, disagreed. It ruled that for PPR purposes the “period of occupation” did not commence from exchange of contracts but rather when completion took place. It held this was Parliament’s intention when the original legislation was approved, otherwise many people would be unable to claim full PPR as occupation normally commenced only when the purchase was finalised. The facts of each case must therefore be looked at closely and it prompts us to consider the scope of PPR and its wider limitations.
What is PPR?
The sale of a property is a taxable event for CGT purposes. The value subject to CGT is the sale proceeds, reduced by the cost of purchase and sale and the cost of improvements made to the property during ownership. PPR is available, however, where you are disposing of your only or main residence. It provides a total exemption from the CGT charge, although restrictions can apply in certain circumstances (eg if the property was a person’s only or main residence for part of the period of ownership).
To claim PPR, it is necessary to fulfil the following two key criteria:
- a dwelling-house must be your only or main residence at some time during your period of ownership; and
- a dwelling-house should not be acquired for the purpose of realising a gain on sale.
Claims can also be made by executors or trustees where relevant.
What is a dwelling-house for PPR purposes?
To qualify as a dwelling house, a property should be suitable for:
- occupation as a home used both during the day and at night; and
- function as an independent, “self-contained” unit. A flat and a caravan have, for example, been classified as a dwelling-house for PPR purposes.
It can include more than one building provided this building forms part of the property or falls within the permitted area for grounds or gardens (as discussed below).
The extent to which gardens or grounds form part of the PPR area
Gardens or grounds surrounding a house up to 0.5 hectares fall within a PPR claim. A larger area is allowed where it is required for the reasonable enjoyment of the dwelling-house as a residence, with reference to the size and character of the house. To maximise a PPR claim, any disposal or part disposal of grounds or gardens should take place before and not after sale of the property.
Ancillary buildings based in the gardens/grounds and the PPR area
Some homes will have “ancillary” buildings (such as outbuildings) based within their grounds. Even if they fall within the permitted 0.5 hectares “zone”, PPR relief may be restricted in certain circumstances such as where the buildings:
- are not ‘occupied’ by the owner of the house, or:
- are used exclusively for the purposes of a trade, business, profession or vocation.
Thus, if an ancillary building can be used independently from the main residence, HMRC will likely argue an ancillary building does not benefit from PPR.
Does the property always need to be ‘occupied’ to qualify for PPR?
No. PPR can, for example, be claimed where there has been a delay in taking up residence due to repairs or redecoration being undertaken prior to occupation, provided the delay is no longer than 12 months (with some exceptions). However, as noted above, a period post-exchange of contracts, but pre-completion of purchase may not benefit from PPR.
PPR: the impact of letting out a property
PPR is not available for the period during which a property is let out. Letting relief may operate to reduce the chargeable gain provided the property qualified originally for PPR. From 6 April 2020 the Government plans to restrict letting relief, with proposals that it will only apply where the owner of the dwelling-house is in shared occupation with a tenant.
Final 18 months of ownership
PPR relief will always be available in the last 18 months of ownership, provided that a property has qualified for PPR at some point during the ownership period. It will apply even if the property is no longer the individual’s only or main residence at the time it is sold (eg because it is let out). The Government has proposed to reduce this period to nine months from 6 April 2020.
Whilst PPR on the sale of a person’s residence can be a straightforward matter, in order to avoid potential sizable CGT liabilities, individuals with land and or ancillary buildings need to consider carefully whether their use of their property as a whole meets PPR requirements. Individuals contemplating a prolonged work related absence from their home should also seek professional advice. As should those acquiring a second property (ideally prior to purchase) regarding steps that can be taken to maximise its application upon a subsequent sale. UK residents acquiring a property overseas and non-UK residents acquiring UK situated property should also seek this advice. Our private client team would be happy to discuss these issues with you to assist in protecting your property interests.