Chris Thorpe looks at some features of a popular and valuable capital gains tax relief.
Principal private residence (PPR) relief is arguably the most valuable capital gains tax (CGT) relief. It can exempt, without limit, the full gain on the sale or gift of one’s sole or main residence.
Given the increase in property prices over the last 30 years, this tax-free gain could be akin to winning the lottery! Unsurprisingly, this is rather costly to HMRC (e.g., £25bn in 2019/20, according to the Resolution Foundation) – so it’s not a relief which passes by HMRC unnoticed.
How does it work?
In many respects, it’s very simple. For as long as a property (anything from a mansion to a narrowboat) is someone’s main or only residence, the gain upon disposal is free from CGT.
Only when someone is absent from the property does the gain need to be carved up into chargeable and non-chargeable periods – the final nine months’ ownership being automatically deemed as occupied (provided the property qualifies as a main residence at some point). The final 36 months are relieved if the owner is in long-term residential care.
Periods of absence
PPR is reduced proportionately for periods when the owner is not in occupation; however, provided the owner comes back after a temporary absence, that absence will be deemed occupation. This can be for three years for any reason, four years for UK-based employment, or open-ended for overseas employment.
Let property
Prior to April 2020, an owner who let out their property could still benefit from up to £40,000 of PPR relief for that period (‘lettings relief’). However, from 6 April 2020, claims can only be made if the owner lives there with the tenant (i.e., the situation is one of a lodger rather than a tenant with exclusive occupation).
Periods of letting prior to April 2020 cannot qualify for lettings relief unless they meet that new co-occupation criterion.
Trusts and PPR relief
Trustees can claim PPR relief, provided the beneficiaries are able to occupy the settled property. Prior to December 2003, a useful piece of tax planning was to place a property into a relevant property trust and claim CGT holdover relief (under TCGA 1992, s 260). Thereafter, a beneficiary lived in the property, after which time the trustees could sell the property and claim PPR relief to exempt the held-over gain.
After December 2003, a PPR relief claim cannot be made if a holdover relief claim has already been made – or a PPR relief claim can be made, but the held-over gain is clawed back.
Main residence election
If someone acquires a second property, they have two years from that point to nominate which should be their PPR. Married couples can only have one PPR between them, whereas an unmarried couple could have a PPR each.
Provided a property has been a PPR at some point in the ownership, a nomination can apply; failure to make an election will result in HMRC making the decision based on the facts. It is possible to switch (‘flip’) the nomination to the most valuable property or the one about to be sold with the largest gain.
Transfers between spouses
Prior to April 2020, where a property was passed between spouses, the recipient inherited the other spouse’s period of ownership (i.e., they were deemed to have owned the property for as long as the original owner). The original owner’s period of occupation was also inherited, but only if it was that transferor’s main residence at the time; otherwise, the recipient would only have owned it from the date of the gift.
After April 2020, that main residence criterion was removed, so even if the transferor spouse has never lived in the property, the recipient’s ownership and occupation time will mirror that of the donor.
Practical tip
PPR relief is very valuable. If someone disposes of a property which they’ve lived in throughout their ownership, it is very simple; but if periods of absence or lettings or spousal transfers are involved, careful thought should be given prior to a disposal.
