Building on solid foundations – making sure you’re eligible for principal private residence relief

By Katherine Bullock

In the Autumn Statement on 5 December 2013, the Chancellor announced a reduction in the final period of exemption for principal private residence relief (PPR). This could make a substantial difference to a number of people thinking of selling their homes.

Currently, when you sell a property which has been your main or only residence for the entire period of ownership you don’t pay and capital gains tax (CGT) on any resulting gain. That’s because the gain is covered by principal private residence relief.

Even if the property has not been your home for the whole period of ownership, there are certain exemptions which mean that the unoccupied element of the gain may also be exempt. The last 36 months of ownership has always been treated as exempt (covered by PPR) regardless of whether the owner was living in the property during this period, or claiming PPR on another property at the same time. But as of 6 April 2014 this final period will be reduced to 18 months.

So if you’re thinking about selling your home but you haven’t been living in it recently you might benefit from thinking about whether you can change your situation.

We’ve recently seen another issue with a taxpayer losing PPR as a result of actions he took, or failed to take! As home improvement shows are becoming increasingly popular on our television screens, it’s no surprise that more homeowners are renovating or redesigning their present homes. One homeowner took a 'grand design' one step too far, with serious tax consequences. The taxpayer was denied PPR when he sold a property built on the site of his main residence which he’d demolished earlier.

This was an unusual and interesting case and seems to be the first which has come to court to discuss whether the two properties need to be considered separately for the purposes of PPR. Not only did HM Revenue & Customs (HMRC) argue that PPR wasn’t available on the gain arising on the ultimate disposal of the new property, it also argued that the taxpayer had acted negligently in not declaring the gain on his return. This resulted in a 50% penalty charge, even though the taxpayer sincerely believed that the property was his principal private residence.

The First-tier Tribunal (FTT) was divided on the question of whether PPR should be available. But the tribunal judge, with his casting vote, found that the natural meaning of the legislation was that the newly built property was not the same as the original – so the nature of residence had to be established separately, which in this case the taxpayer couldn’t do.

With the recent changes to PPR in the Autumn Statement and the increasing challenges by HMRC, homeowners should be aware of the wider tax implications of doing things which affect your home or where you live from time to time. If you have any questions on whether PPR would be available to you, please do get in touch.

Request a meeting with our specialist