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Don’t assume automatic Capital Gains Tax relief when selling your home

In this article we explain the qualifying criteria for Principal Private Residence Relief. It enables some people not to have to pay Capital Gains Tax on their sold property’s gain value.

09 September 2019

While Stamp Duty Land Tax is not one most homeowners relish paying when they move home, a potentially bigger sting in the tail would be a capital gains tax (CGT) bill. Fortunately, when you sell your home for more than you originally paid for it, a relief known as the Principal Private Residence Relief (PPR) is often applicable. 

Some also refer to it as the Private Residence Relief. The relief stops many homeowners having to pay 18% or 28% CGT on the property’s gain in value, depending on their tax bracket.

Changes are afoot at HMRC

Historically HM Revenue & Customs (HMRC) paid little attention when someone sold their home, but this is changing. Modern data collection and sharing means HMRC now have access to:

As a result, they are comparing data to find situations where PPR should be denied. In some cases, they are going to tribunal where they think CGT is owing.

A deadline not to miss

From April 2020 HMRC requires a notification of sales of residential property with a calculation of the tax position and payment of any tax, within just 30 days of completion. No return is required where full relief is due and HMRC are likely to continue their recent trend of targeting cases where they feel this relief should be denied. It’s worth then becoming familiar with PPR’s main features to lessen your chances of an HMRC investigation.

How to qualify for Principal Private Residence Relief (PPR)

1. Demonstrate permanence – To qualify for PPR you need to be able to demonstrate you occupy the residential property as your main home with the intention of permanence. Be mindful, if you are planning your eventual sale (liaising with estate agents etc) prior to moving in, then HMRC may question the intention of your permanency.

2. Equip for normal living – Your claim for relief would be jeopardised if the property you sold had not been equipped for normal living whilst you lived there. It should have been adequately furnished with a cooker and a washing machine for example.

3. Beware times of absence – Absences from the property prior to selling need to be considered. For example, absences when the home has been let historically qualified for a further relief known as letting relief.  From 6 April 2020 this relief will only be allowed when the home is shared with the tenant.

4. Land enjoyed as part of the dwelling – The land around the home you’re selling (such as its garden) is included in PPR only if it’s enjoyed as part of that dwelling. If the land is used for other purposes, such as business use, then this may be excluded from PPR. Be mindful that a property’s grounds in excess of 0.5 hectares (that's just over 1.2 acres) may also fail to qualify for PPR depending on the size and nature of the dwelling.

5. Personal circumstances – can also affect whether you qualify for PPR or not. For example, a couple in a marriage or civil partnership can only have one qualifying home between them. If each own a home, then it’s important to elect which property will be used for PPR qualification after the marriage/civil partnership and going forward.

6. Ownership period – The ownership period of the property can also throw up problems as a property may be unoccupied for a time. If a property has at some point been your main residence, some periods can be deemed to be periods of occupation even if you are not residing in the property. The most common of which is the final 18 months of ownership. From 6 April 2020, this final period is reducing to 9 months.  For disabled persons or people who have moved from their main residence into a care home this final period is extended to 36 months. 

Summary

In many cases Private Residence Relief (PPR) can be used to offset a Capital Gains Tax (CGT) liability when selling a home whose sales price has made a gain for the owner.  Be mindful though that there are qualifying criteria for the Relief and you need to ensure you fit within those.  Also, watch out for increased HMRC investigations into recouping CGT on property sales.  If you need help or further advice, contact Kerrie Knowles and the Shipleys Tax team on tel. 01483 423607.

If you would like a more detailed explanation of CGT exemption for main residences, including an example, read our article Main Residence CGT Exemption.

Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary, if you would like advice or further information, please speak to your usual Shipleys contact.

Copyright © Shipleys LLP 2019

Article written by Kerrie Knowles

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