Count the ways to minimise tax on property sales profit
EARLIER this year HM Revenue & Customs (HMRC) launched another salvo against tax avoidance, the Property Sales Campaign, targeting people who had not reported gains on property sales.
Although this campaign ended in September, it is worth remembering that not all profits made on property sales are subject to Capital Gains Tax (CGT). In particular, the Principal Private Residence (PPR) relief can apply to reduce or eliminate the gain from tax where a property has at some time been used as the owner’s main residence.
PPR relief provides full CGT exemption for any profit made on the sale of a property that has been the individual’s residence throughout the entire period of ownership. This key relief is the reason why there is no CGT to pay when people sell their homes in the most straightforward cases.
But what if the property has not been occupied as the only or main residence throughout the entire ownership period? In this case there are some extensions to the main PPR relief that can cover periods of “non-occupation” and still ensure that the profit on sale is tax-free.
For instance, a property may be acquired at a time when the purchaser cannot move into it because building work is not yet complete or because the property requires renovation or redecoration. Here, the Revenue will normally allow nonoccupation of up to 12 months with PPR relief (in addition to the relief that may also be running on their current home).
Provided a house has been an individual’s residence at some point, the last three years of ownership are normally 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.
If a person acquires a second residence they 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 their main residence for tax purposes. Once made, the election can subsequently be varied in order to maximise PPR coverage and minimise tax exposures.
The property that is expected to produce the larger gain would usually be the one nominated to retain any PPR election over the longer term, but this may not necessarily be the property which is lived in for the majority of the time.
Careful PPR election planning 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 on both properties.
In addition to the “final three years” rule, some periods of absence can also qualify as “deemed” occupation in certain circumstances and so maintain continuous PPR coverage, including: Three years for any reason (not necessarily a consecutive three-year period); any period of absence abroad for employment purposes; a period of absence of up to four years for employment purposes elsewhere in the UK.
PPR relief may be further extended where a qualifying residence is also let out. Here, the period of letting may also qualify for PPR relief by way of “residential lettings relief”.
For example, a property owned for seven years, occupied for the first two years and let out for the remaining five years, will qualify for full PPR coverage. This is due to a combination of relief for occupation, lettings relief and the final three years’ ownership. In cases where a property has been let as an investment property and where any profit on sale would otherwise be fully taxable, with careful planning it may be possible for the owner to move into 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, tax Consultant at Garbutt & Elliott, tel: 01904 464100 or email to email@example.com.