Principal Private Residence (PPR) Relief

Introduction

Residential property owners have had numerous tax changes to deal with in recent years and there are more on the horizon!

From 6 April 2020 a new 30 day reporting and payment window will come into effect for sales of residential property where a Capital Gains Tax (CGT) charge arises. A standalone return will be required to be submitted to HMRC within 30 days of completion, along with a payment on account of CGT based on an estimated calculation of the gain. Disposals made on a no gain/no loss basis (for example between spouses or civil partners) are excluded from the obligations and they are most likely to affect those selling a second home or rental property on which relief is not available. Taxpayers will be permitted to factor in realised capital losses and available reliefs into their calculations and any adjustments to the final tax position will be made as part of the Self Assessment tax return process following the year end. Preparation will be key to meeting this tight 30 day timeframe and to keeping the tax payment as close to the correct figure as possible.

Further changes curtailing Principal Private Residence (PPR) relief will come into effect from the same date and two useful concessions are being incorporated into legislation. An extension to PPR is also being introduced for members of the armed forces who occupy accommodation alternative to their normal home, due to job requirements. Alice Pearson examines the intricacies of these changes and demonstrates how the impact will be felt by those disposing of residential property, using examples to highlight the issues.

Principal Private Residence (PPR) relief – changes from 6 April 2020

Although the legislation is still in draft, a number of changes to PPR relief are due to take effect from 6 April 2020. This is a valuable relief an individual receives when a capital gain is realised on the sale of his or her only or main residence.

As well as a reduction in the final exemption period and changes to lettings relief (see Courtney Halifax’s article ‘Capital Gains Tax and Separation’ for details), a number of technical changes have been announced to the ancillary reliefs:

1. Transfers between spouses

Generally, where assets (including homes) pass between spouses this occurs at no gain/no loss for capital gains tax purposes.

Although I refer to spouses in this article, the legislation applies equally to civil partners.

Current PPR rules

At present, where a home is transferred between spouses, the recipient spouse inherits the transferring spouse’s ownership history so long as the property is their main residence at the time of the transfer. As a result, the receiving spouse can treat any period where the property was occupied as a main residence by their spouse as their own.

Where the property was not the main residence at the time of transfer, in some cases these rules can work in the taxpayer’s favour:

Example 1: Emma purchased a buy-to-let property in 2006.  In 2014 she married Dan and shortly afterwards she transferred full ownership of her buy-to-let property to him. As a married couple, this transfer occurred at no gain/no loss. Immediately after the transfer they moved into the property as a main home, which was later sold in 2019.

As the property was not their main residence when Emma made the transfer to Dan, he does not inherit Emma’s ownership history. The fact that Emma had never occupied the property as a main residence prior to 2014 is therefore disregarded. Dan on the other hand has occupied the property as a main residence from the date ownership was transferred to him and therefore full PPR relief is available on the sale.

The existing rules can also work to deny PPR relief on a property that may have been used as a main residence in the past but is not so used at the date of the transfer:

Example 2: Tom acquired a house in 2002, which he occupied as a main home.  In 2014 he married Kate, they both took up residence in Kate’s house and Tom’s property was let out. After the wedding Tom decided to transfer a 50% share in his property to Kate. As a married couple this transfer occurred at no-gain/no-loss. They decided to sell the property in 2019 and, as joint owners, the gain is split 50:50.

As is the case in Example 1, Tom’s property was not their main residence at the date of transfer and therefore Tom’s ownership history is not transferred to Kate. However, in this scenario this works to Kate’s detriment in that she has never occupied Tom’s property as a main residence and therefore no PPR relief is available on her 50% share of the gain. Tom is however able to claim an element of PPR relief on his share of the gain to take into account his periods of occupation and the final exemption period of 18 months.

New PPR rules

In order to be more consistent the existing rules will be amended so that, where the transfer takes place after 5 April 2020, the recipient will inherit their spouse’s ownership history regardless of whether the property is their main residence at that time. 

If the transfers and the sales in the above examples occurred after 5 April 2020 the position would be as follows:

Example 1: Based on Emma’s historic use of the property, Dan would not be able to claim PPR relief for the period between 2006 and 2014, as the property was let out by Emma.

Example 2: Kate would be able to claim an element of PPR relief on her 50% share of the gain for the period between 2002 and 2014, when Tom occupied the property as a main residence.  She would also benefit from the final period exemption, although as the sale will occur after 5 April 2020 the period will be reduced to 9 months.

There will be winners and losers as a result of this change. Therefore, if you are considering making such a transfer, we recommend you contact us so that we can advise as to whether it would be preferable to accelerate the transfer before 6 April 2020 or postpone this until after the new rules are enacted.

2. Extra-Statutory Concessions (ESC)

An ESC is a relaxation that gives taxpayers a reduction in tax liability even though the allowance would not strictly be available under tax legislation. For the purposes of PPR, there are two ESCs of relevance and these will be legislated from 6 April 2020:

a. Late claims in multiple residence cases

Where an individual has more than one home, they are able to nominate one of the properties to be their PPR and there is a two-year time limit for making this nomination. Strictly speaking an individual should nominate a property even if only one of the properties has any real capital value. For example, where an individual owns a family home in the country but they spend their working week in a rented flat in London.  In this case, and where the individual is unaware that such a nomination could be made, the concession provides an extension to the two year limit. The nomination must be made within a reasonable time of the individual first becoming aware of the possibility of making a nomination.

In the draft legislation there is no longer the need to demonstrate that the taxpayer was unaware of the need to make the nomination, nor is there a need for a nomination to be made within a reasonable timeframe. However, if the individual has made a nomination at any time previously a late claim cannot be made.

b. Short delay in taking up residence

It is not unusual for an individual to acquire a house to live in, as their main residence, but then to be unable to occupy the property immediately because certain alterations or decorations need to be carried out. Similarly, a delay in occupation may occur when an individual acquires land on which to build a main residence.

This concession allows PPR relief during this period of absence provided it does not exceed 12 months. In exceptional circumstances, outside of the individual’s control, this period can be extended to 24 months.

In the draft legislation the time limit is 24 months in all circumstances, which is more generous than the existing concession. Note however, this period runs from the date of exchange of contracts rather than completion, which will no doubt eat into the 24 month window.

3. Job-related accommodation

Where an individual owns a house, which they intend to use as their main residence, but they reside in job-related accommodation instead, the period of absence from their house is still covered by PPR relief. This assists members of the armed forces who live in accommodation provided by the Ministry of Defence (MOD).

This relief is to be extended to members of the armed forces who do not live in accommodation provided by the MOD but they receive an armed forces accommodation allowance instead under the Future Accommodation Model.

This change will not apply from 6 April 2020 but it will instead apply from when the income tax exemption for the armed forces accommodation allowance comes into force.

Our Private Client team can provide specialised opinion across these areas. If you feel that anything discussed above may potentially affect you, please do not hesitate to contact your usual Mercer & Hole contact, or a member of the Private Client team to discuss your own circumstances in more depth.