Count the ways to min­imise tax on prop­erty sales profit

Yorkshire Post - Property - - PROPERTY - Richard White­lock

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 rwhite­lock@gar­butt-el­liott.co.uk.

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