Careful planning can maximise relief from homes tax
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.