Care­ful plan­ning can max­imise re­lief from homes tax

Yorkshire Post - Property - - PROPERTY -

through­out the en­tire own­er­ship? There are sev­eral ex­ten­sions to PPR re­lief that can cover these pe­ri­ods of “non-oc­cu­pa­tion” and still en­sure that all of the profit on sale is tax-free.

Oc­ca­sion­ally, a prop­erty may be ac­quired where the pur­chaser can­not move into it be­cause the build­ing work is not yet com­plete or the prop­erty re­quires sig­nif­i­cant al­ter­ation or re­dec­o­ra­tion work. Here the Rev­enue will al­low any nonoc­cu­pa­tion in the first 12 months to be cov­ered by PPR re­lief (in ad­di­tion to the re­lief that may also be run­ning on their cur­rent home).

Pro­vided a house has at some point been an in­di­vid­ual’s res­i­dence, the last three years of own­er­ship are al­ways ex­empt from CGT, whether or not they oc­cupy the prop­erty dur­ing that time. This par­tic­u­lar el­e­ment of PPR re­lief can lead to some very ef­fec­tive tax plan­ning, par­tic­u­larly on sec­ond homes and the abil­ity to nom­i­nate which of the two prop­er­ties is to be treated as the PPR.

PPR re­lief on sec­ond homes be­came some­thing of a hot topic in 2009 as it came un­der scrutiny fol­low­ing the MPS ex­penses scan­dal, with sev­eral MPS crit­i­cised for “flip­ping” the nom­i­na­tion as to which of their two res­i­dences should count for tax pur­poses. If you ac­quire a sec­ond res­i­dence, you can make a for­mal elec­tion to the Rev­enue within a two-year time limit to nom­i­nate which of the two homes is to be treated as your main res­i­dence for tax pur­poses.

Once made, the elec­tion can be varied in or­der to max­imise PPR cov­er­age and min­imise tax ex­po­sures; of­ten the prop­erty likely to re­alise the largest cap­i­tal gain will be the one to re­tain any PPR elec­tion over the longer term, which is not al­ways the one which is lived in for the ma­jor­ity of the time.

Care­ful plan­ning with the PPR elec­tion can pro­duce sig­nif­i­cant tax sav­ings. By en­sur­ing that both homes are nom­i­nated at some point, this will, at the very least, se­cure re­lief for the last three years’ own­er­ship.

In ad­di­tion to the “fi­nal three years” rule, cer­tain pe­ri­ods of ab­sence can also qual­ify as deemed oc­cu­pa­tion in cer­tain cir­cum­stances and main­tain con­tin­u­ous PPR cov­er­age, in­clud­ing:

Three years for any rea­son (not nec­es­sar­ily a con­sec­u­tive pe­riod of three years);

Any pe­riod of ab­sence abroad for em­ploy­ment pur­poses;

A pe­riod of ab­sence of up to four years for em­ploy­ment pur­poses else­where in the UK.

If these pe­ri­ods are ex­ceeded, only the ex­cess is counted as a pe­riod of non-oc­cu­pa­tion, so pe­ri­ods of ab­sence can oc­cur with­out any ad­verse im­pact on the PPR re­lief. There is also a very im­por­tant ex­ten­sion to the PPR re­lief for qual­i­fy­ing res­i­dences that are let at some point dur­ing their own­er­ship. Here, the pe­riod of let­ting (sub­ject to a cal­cu­lated over­rid­ing max­i­mum) can also qual­ify for PPR re­lief by way of “res­i­den­tial let­tings re­lief”.

As an ex­am­ple, a prop­erty could be owned for eight years, oc­cu­pied as the main res­i­dence for the first two years and let out for the re­main­ing six years, and still qual­ify for full PPR cov­er­age. In cases where a prop­erty has been exclusively let as an in­vest­ment prop­erty and any profit on sale would be fully tax­able, it may be pos­si­ble with care­ful plan­ning for the owner to live in the prop­erty for say the fi­nal year be­fore sale, with the re­sult­ing com­bi­na­tion of PPR and let­tings re­lief shel­ter­ing most, if not all, of the gain from tax.

Richard White­lock is a tax con­sul­tant at Gar­butt & El­liott, tel: 01904 464100, www.gar­but­tel­liott.co.uk.

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