A most useful tool of tax planning is likely to be coming to an end.
It has been possible to structure the affairs of the owners of more than one property so that Capital Gains Tax (CGT) has not been payable between spouses when one dies or when they sell. This has been one application of a provision called Principal Private Residence relief (PPR).
The general PPR rule is currently that if a property has always been occupied as the main home, any gain arising on the sale of the property is exempt from UK tax. (However, if there is a period in which the property is unoccupied, or is not your home, CGT may come into play when it is sold).
For gains on sales prior to 6 April 2014, PPR is available for the last three years of ownership of a property that has been a main residence at any time. This is the case regardless of whether or not it has been occupied during the last three years of ownership.
But as a result of the recent Budget, from 6 April 2014 the automatic exemption from tax on gains in relation to the final years of ownership is now restricted to cover the last 18 months rather than three years.
This change may affect people if they have moved and are having problems selling their home, with the result that the property is empty for a period of time. In these circumstances it is possible that PPR may not exempt all of the capital gains, with the result that some tax is due when the property is eventually sold.
Further changes – PPR at risk
The Government wants to go further than this in its restriction of CGT exemptions. Ironically, UK multiple homeowners are not the primary target in this case: but they are caught by EU rules that forbid any differentiation between the treatment of UK and other EU citizens.
Under PPR it is possible for UK expats to elect for a UK building to be their ‘principal residence’, even if in fact they live predominantly abroad. To stop this, H M Revenue & Customs (HMRC) has recently published a consultation document entitled “Implementing a capital gains tax charge on non-residents”.
But UK-resident owners of more than one home can also make an election to choose which property is their main residence, therefore qualifying for PPR relief. Just nominating a home for as little as one week should qualify it for 18 months’ worth of PPR. This has allowed second homeowners (most notably MPs!) to “flip” their main residence: so that more than one home qualifies for the relief and they can reduce the capital gains tax charge when they sell.
To stop such practices, Section 3 of the HMRC document proposes that the present PPR election be scrapped for UK home owners and replaced by less advantageous rules. The report outlines two possible options:
- Remove the ability for a person to elect which residence is their main residence for PPR. Instead, PPR would be limited to the property that is demonstrably the person’s main residence. The decision would not be based solely on where an individual spends their time, but also factors such as where children live and attend school, where the individual is registered to vote, which property is the contact for bank and tax correspondence and where the person is registered with a doctor.
- Replace the ability to elect with a fixed rule that identifies a person’s main residence, e.g. the property in which the person has been present the most for any given tax year. This method is likely to require individuals to keep additional records.
Will it affect me?
There are several scenarios that could cause taxpayers to be adversely affected. For example:
- One member of a married couple is working away in town and has a pied-a-terre for weekdays. If HMRC choose to regard the most-used dwelling as the principal residence, then the more valuable country house may become subject to CGT.
- Conversely, the authorities may choose to regard the country house as the principal residence even though the London flat is now worth far more.
- People who work a lot from home may use their weekend cottage for more days of the week than their principal residence. This may also lead to problems with HMRC.
Clearly, good taxation advice is likely to be required.
When will this happen?
It is only a consultation at the moment but it is likely that any changes to legislation will be effective from April 2015.
As the proposals won’t come in until then, you have time to review the CGT position on each of your homes and, if you haven’t done so already, decide whether you need to make, or vary, an election – you have two years from the date of starting to use the second property as a residence (or having a new combination of residences) to make an election, and it can be varied at any time (and backdated by up to two years).
Private Residence relief is very complex, but tax savings can be made when selling or bequeathing a property.
For more information contact Loveth on 01733 305163 or email her email@example.com