Principal Private Residence Relief is the capital gains tax relief which applies to the sale of a main home. The relief covers the period that an individual has physically occupied the home plus an additional 18 months (this is now changing). Relief is available for periods of occupation. The relief fraction relates to periods of occupation/periods of ownership. Therefore, if there have been any periods of absence this may reduce the amount of relief available.
The reduction of the final period from 18 months to 9 months was under consultation and we had been hoping HMRC would have listened to the responses across the professions that the reduction to 9 months would have a huge impact on taxpayers. However, the draft legislation was released last week and we can see that HMRC are pushing ahead with the reduction. From April 2020 individuals will only have an additional 9 months to add to their periods of occupation.
H &W married and bought their marital home in 2005.
Example One – Old Rules
H & W are separating and H moved out of the home in June 2019.
Under the old rules (from now until 5 April 2020) H would have a PPR exemption on the property for the period up to December 2020 (being 18 months from the date he moved out of the home). If he sells or transfers the home during this period of time there would be no CGT to pay.
Example Two – New Rules
H & W are separating and H moved out of the home in April 2020.
H would have a PPR exemption on the property for the period up to September 2020 (being 9 months from the date he moved out of the home).
What happens in the case of Example 1? When April 2020 arrives will H already be out of his exemption period ?
The short answer is yes we think so – as the legislation has just been drafted we are reviewing it and seeking some clarification. Once we know more we’ll share with you.
Who is this going to impact?
Clearly the impact of this will be widespread. In basic terms it will impact anyone who has moved out of their home prior to selling/transferring their main home. We think the main area for concern here is that clients may not be aware of the changes and therefore be operating under the belief that they will continue to have an 18 months grace period. This will almost certainly have an impact on separating and divorcing couples who previously have taken full advantage of the 18 month exemption.
Communicating this to clients
As we now know these new rules are coming into operation you should be flagging this up with your clients if they have moved out of the marital home. They need to be aware that they may have a potential CGT liability and they should seek advice.
The nine month period is clearly very short (especially in the cases of matrimonial breakdown) so the first aim will be to not unnecessarily extend the period. Be really clear with clients about the date they left the home, vague answers such as ‘some time last year’ will not help them maximise their nine month period.
The absence period looks at the date that the individual ceased being living in the home. The natural follow on question to that is…
How will HMRC know?
Clearly no HMRC officer will be in the property at the time the decision is made, however, they do have access to increasing amount of data which they are using to piece together timelines of events to try to challenge PPR claims which we are seeing more and more of in the courts. The best defence to possible investigation is to have a narrative which is backed up by evidence.
I would suggest including any living situation in file notes which you are making especially if the couple are still living together at the time they come to meet with you.
Is there anything that can be done to mitigate the charge?
Yes, if they are transferring the property to their spouse there is an election they can make to treat the property as their main home (this is only valid if an election has been made within 2 years of the transfer).
If they have periods of absence for other reasons such as, moving abroad for work or moving within the UK for work there may be further exemptions to be explored.
All individuals have a capital gains tax annual allowance (currently £12,000) so if the property sells after 10 months it’s unlikely to have any tax consequences as only one month will be chargeable and the gain is likely to be covered by the annual allowance. They may still have an obligation to report the gain though.
Getting advice early on about potential CGT implications should help in negotiations and discussions.
One last thing.
My next webinar with Class Legal is on 29th October 2019 at 1pm. We will be covering:
- When to appoint a single joint expert and why?
- What to expect from your single joint expert?
- Checklist of when a single joint expert may not be required
- Reading a SJE report
Attendees can expect to leave the session with
- Knowledge of when a tax single joint expert is required
- Understanding how to best explain this to clients
- Awareness of how best to digest the report
You can register here