PPR does not apply to the sale of all homes, says Peter Shand
With UK price growth hitting double digits for the first time in four years, many homeowners will be looking to cash in on increased equity. But not all surpluses will be tax-free.
Principal private residence relief (PPR), applies to any property which is the only or main residence of the owner throughout his or her period of ownership (or since 1982, when Capital Gains Tax – CGT – was introduced). This will apply to the vast majority of UK sales and as the relief is available automatically the vendor need take no further action.
However, in less straightforward circumstances a seller may become unwittingly liable to a CGT charge and specialist advice is particularly important given recent changes in the law. The second home owner: Where someone owns and occupies more than one home, they can elect which property has the benefit of the relief. The decision must be made within two years of any change in the number of properties owned (for example, a sale or purchase). If the owners are married, they must make a joint election, to prevent one household achieving double benefit. If a choice isn’t made, a decision will be based on levels of residency.
It used to be the case that the last 36 months of ownership was always eligible for PPR, provided the property had been occupied as an owner’s main residence at some point. In this year’s budget, however, the Chancellor reduced this to 18 months – which reduces the scope of the relief for second home owners and the types of owner discussed below others.
The owner not in occupation: There are special exemptions for people required to live away from their property, for example because they work abroad or are required to live in premises provided by an employer.
Special exemptions also apply to a person who leaves the family home on the breakdown of a relationship, but these are limited. Advice should be sought as soon as possible following the separation, to ensure reliefs aren’t lost.
If the owner chooses to let out a property he or she has previously occupied, lettings relief may be available when the property is sold. This relief is limited to a sum which is the lower of £40,000 or a proportion of the total gain.
The trustee: Setting up a trust can be particularly useful when buying property for children (for example, student accommodation), as significant inheritance tax (IHT) savings can be achieved, but again care should be taken as a trust’s CGT annual allowance is only half that of an individual (at current rates £5,450 compared to £10,900).
However, where the property is occupied by a beneficiary who is entitled to occupy (rather than just allowed) and the property is their main or only residence, trustees can claim PPR through the beneficiary.
Where PPR is not available, trustees may be able to distribute assets to individual beneficiaries to enable them to apply their greater CGT allowance against the sale, though this can trigger other tax consequences.
Trusts might also be a good vehicle for the purchase of second homes, but they are not always appropriate. They can also be used to mitigate IHT but only if the IHT benefits work in harmony with CGT planning, so advantage is not cancelled out.
The property with substantial grounds: Where PPR is permitted it is generally available on the whole gain in value on the property. However, in cases where the “lot” includes ground of more than half a hectare, the gain in value on the land is usually excluded from the relief, unless it can be shown it was required for the reasonable enjoyment of the household and not used for commercial or quasi-commercial purposes.
Companies owning residential property: The Chancellor has extended the CGT regime in one direction – to companies holding residential property. Where the property is valued at more than £2 million, the company will pay CGT at 28 per cent. However this is only the start of a wider process; the rule will apply to companies owning residential property valued at £1m-plus from April 2015 and £500,000-plus from April 2016.
Non-residents: Non-residents who own residential property in the UK are normally excluded from CGT, but from April 2015 the government plans to introduce a CGT charge on disposals of UK residential property, including property held in offshore trusts.
• Peter Shand is a partner with Murray Beith Murray. www.murraybeith.co.uk