This unique article examines the capital gains tax consequences of the disposal of a taxpayer’s principal private residence. Although a principal private residence is not a chargeable asset for Capital Gains Tax purposes, a CGT liability may arise when a property is disposed of which has been used as a residence for only part of the period of ownership or which has been used partly as a residence and partly for other purposes.
Principal private residence
A dwelling which is a taxpayer’s only or main residence is known as that taxpayer’s principal private residence ( PPR ). A taxpayer’s PPR in not a chargeable asset for Capital Gains Tax Purposes. Therefore, any gain which arises on the disposal of a principal private residence is not chargeable to tax any loss which arises is not allowable. For a property to be regarded as PPR, the taxpayer must actually occupy the property as a main residence. Mere ownership is not sufficient. Furthermore, the term “ residence “ implies a degree of permanency and it is unlikely that the Principal Private Residence exemption will apply to a property which has been used only as temporary accommodation. In “ Goodwin v Curtis ( 1998 ) a property which had been occupied by the taxpayer for only 32 days did not qualify as a residence.
The large majority of taxpayers own a single property and reside in that property, so that it is obvious that the property is the taxpayer’s PPR. However, the following points may be relevant in more complex cases.:
1. A taxpayer may have only one Principal Primary Residence at any time.
2. A taxpayer who owns and lives in two or more properties he or she may make an election to determine which property is to be regarded as the PPR. Such an election must be made within two years after the date from which it is to take effect. If no election is made, then the matter is decided by the facts of the case.
3. A married couple who live together may have only one PPR between them. This rule also applies to civil couples who live together.
4. The PPR exemption cover the residence itself together with grounds or gardens of up to half a hectare in area. Larger areas may be included in the exemption if they are warranted by the size of the residence.
5. The requirement that there must be actual residence in the property is relaxed if the taxpayer is required to live in job-related accommodation. In these circumstances, the PPR exemption is extended to any property which the taxpayer owns, so long as he or she intends to occupy the property as a main residence at some time in the future.
6. If a property has been occupied as a PPR for only a part of the period of ownership, only a part of the gain realised on disposal will be exempt from CGT. The exempt part of the gain is equal to the length of the period of residence divided by the length of period of ownership multiplied by the whole gain. If a property has been the taxpayer’s PPR for some time, the final nine months of ownership count as a period of residence whether or not the taxpayer was actually resident during those nine months. This rule applies even if the taxpayer claims another property to be his or her PPR during the nine months.
Clarification of a Deemed Residence
The period of residence in a property is deemed to include certain periods when the taxpayer was not actually resident, so long as :
1. There is a period of actual residence both at some time before the period of absence and at some time after the period of absence , and
2. The taxpayer claims no other property to be a PPR during the period of absence.
These periods of “deemed residence “ are as follows:
3. Any periods of absence during which the taxpayer is working in an employment, all of the duties of which are performed outside the UK or is living with a spouse or civil partner who is working in such an employment.
4. A total of up to four years of absence during which the taxpayer is prevented from living in the PPR because he or she is employed elsewhere in the UK or is living with a spouse who is employed elsewhere in the UK.
5. A total of up to three years of absence for any reason. The requirement that the taxpayer must reside in the property at some time after the period of absence does not apply if the absence is work-related and the terms of the employment prevent the taxpayer from returning to the residence.
Tax Letting Relief
An extension to the PPR exemption, known as “letting relief”, may apply if the owner of a property which is his or her PPR has at some time during the period of ownership let out part of the property as residential accommodation, so that occupation of the property has been shared with a tenant. For Instance , the owner of a house that has previously been occupied entirely as a PPR might let a room or rooms to a tenant whilst continuing to occupy the rest of the house as a PPR. In such a case, the usual PPR exemption on disposal of the property will cover only:
1. The gain arising on the whole property whilst occupied solely by the owner.
2. The gain arising on the whole property in the final nine months of ownership and
3. The remainder of the gain, but only to the extent that this is attributable to occupation by the owner.
The balance of the gain will be chargeable to CGT, but may then be reduced or eliminated by letting relief. In general, letting relief will not be granted if there have been structural alterations to the property, so that the part that has been let is entirely separate from the accommodation which forms the owners residence. Example: If the rooms occupied by the tenant comprise a self-contained flat with its own access from the road.
Letting relief is calculated as the lowest of :
1. The gain which arises by reason of the letting.
2. The gain which is exempt because of the PPR exemption
3. £40,000
Thanks for Reading: Martin J Craighan – Director Salford Tax Specialists Ltd
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