Principal Private Residence Relief To Change

Do you benefit from Principal Private Residence Relief? If so, the Government has announced restrictions to become effective in April.

The Government has announced restrictions on main residence relief for Capital Gains Tax purposes. The relief is generally known as “Principal Private Residence Relief” (or PPR for short). It is available if a dwelling (or part, including a flat) has been an individual’s only or main “residence” at some time while he owned it.

“Residence” for the purposes of PPR relief has not actually been defined by statute but a 1998 Court case stated that to qualify as a residence, the individual must provide some evidence that his living in the property showed some degree of permanence, some degree of continuity or some expectation of continuity. Recent cases have shown H M Revenue and Customs attacking short-term ownership on this ground.

Where a residence qualifies for PPR relief for only part of the individual’s ownership period, there will be a time apportionment of any capital gain, with the time qualifying for PPR as a proportion of the total ownership period. Until the recent changes announced by the Government, the last three years of ownership have been treated as exempt in any event, provided that the property qualified for PPR relief at some point during the individual’s ownership of it. The original period of three years was meant to help out individuals who were having trouble selling their property as, when the rule was brought in, the property market was at an all time low, with very high interest rates and negative equity problems which made selling very difficult. The idea was to give people time to sell one property after moving to a new home.

However, H M Revenue and Customs believe that this opens up opportunities to avoid tax and that circumstances with regard to the property market have since changed. The new rules, which are expected to be enacted in July 2014, will affect all contracts for sale exchanged from 6 April 2014. What is proposed is that the final period exemption be reduced from three years to eighteen months unless the individual or their husband/wife/civil partner is disabled or a long term (at least three months) resident in a care home. There are further rules to be satisfied before the old three year period can be applied.

Special care has to be taken where you own or occupy two or more dwelling houses, including by lease or tenancy. In that case, you can elect which of those properties is to be treated as your PPR. There are strict time limits for making the election and care should be taken. If no election is made the H M Revenue and Customs will decide which is your main residence, based on the facts.

For more information on PPR or help with any other Financial Services or Private Client matters, please contact a member of the Financial Services or Private Client team.