Be prepared for Principal Private Residence Relief changes
What to expect from the Principal Private Residence Relief changes being introduced.
What do you need to know about Principal Private residence relief and how do you claim a full relief?
Principal private residence relief (PPR) is a tax relief that can be claimed on Capital gains tax (CGT) on the profits when you either sell your private house entirely, a portion of your house or any minor part that is attached to your house like a garden or a ground. If you are not sure how this applies to you our team of Personal Tax Accountants will be able to guide you in the most relevant manner.
You get to enjoy a full relief on your capital gains tax (CGT) only if:
- the private home you are selling has always been your main residence during the period of ownership
- you have been present in the residence throughout the period of ownership (except for the period you were not available due to employment reasons)
- entire or even a portion of your house has not been used for letting or other business activities
- the garden or ground attached to your house does not illegally encroach.
Important announcements by HMRC:
HMRC made an important tax-related announcement back in the budget for 2018, the announcement targeted a group of people who were following practices of generating income by selling their house(s).
As amendments were being presented, special emphasis was given on the Principal private residence relief (PPR). Whilst the proposed changes will come into effect from April 6th, 2020, these amendments are expected to accumulate more than £470 million for the national treasury over a period of 5 years from the day of implementation.
In this article, we intend to address the nature of these amendments and the impact they are going to have on residents in the UK. If you have sold a property, believe that PPR might be applicable to you, we always recommend being prepared by finding a competent small business accountant in London, a chartered accountant, an accounting firm nearby, or an experienced tax accountant.
Amendments to principal private residence relief:
Two key amendments to principal private residence relief (PPR) were introduced according to a document published by HMRC:
- First amendment – The final period exemption would be nine months instead of eighteen months.
- Second amendment – PPR will only be applicable to those fulfilling the ‘shared occupancy’ criteria.
Why did the HMRC reduce the final period of exemption?
The final period exemption was initially incorporated in the PPR to make sure the taxpayers who are selling their houses, get to enjoy the deductions from capital gains tax (CGT) on the earnings made either through letting or selling their house during the final 18 months (9 months after the amendment) of its ownership, just by the time their house is sold, irrespective of the fact that they moved into a new residence.
The reasoning behind the reduction of the final period exemption can be somewhat due to the volume of property sales in the UK at the time of budget 2018, but HMRC clearly stated that the proposed time period is still twice the length of the duration in which an average property transaction usually completes.
What conditions allow you to claim the lettings relief?
According to the amendments, the letting reliefs can be claimed by those landlords who share their residence with at least one tenant, whilst the landlord himself lives there. Landlords who let the entire residence are barred from claiming the lettings relief.
Most of the landlords will witness a substantial increase in their capital gains tax (CGT) due to this amendment, with a marginal increase of £40,000 on the sale of a house that was entirely rented-out previously. If you are a landlord we advise taking professional advice from an accountant prior to the sale taking place.
What other amendments are under consideration?
HMRC has also suggested several other amendments that might come into implementation by April 6th, 2020:
The first one suggests that a late claim on relief is applicable in a situation where an individual buys a second property, only if the individual was unaware of the fact that a claim could be made in the first place.
Another recommendation by HMRC is for the protection of homeowners who delay moving into their property. This proposed recommendation will protect such homeowners by extending the delay from one year to up to two years in exceptional cases.
Finally, HMRC proposes amendments on conditions which allow claiming Private residence relief if the property is transferred to spouses or civil partners during the process of transfer.
Previously, the period of ownership was subject to two conditions:
- The property was the main residence when transferred to a spouse(s) or civil partner(s):
Irrespective of the fact that the recipient is living in transferred property, the recipient will have to take period ownership from the transferor.
- The property was not the main residence when transferred to a spouse(s) or civil partners(s):
The recipient gets the ownership by the day the transfer has been completed, only if the transferred property was not the main residence of the actual owner.
The HMRC proposition wants to ensure that the recipient of the property always gets the period of ownership from the transferor regardless of whether the transferred property was the main residence or not at the time of transfer.
The main purpose of this amendment as quoted by HMRC is to deter the recipients from taking full advantage of Private residence relief.
Overall policy changes can be further explained through an example:
Daniel buys a property that can be rented out in 2011 and gets married to Janice in the year 2017. From 2018, they start living together in Daniel’s property which was purchased back in 2011. Before moving in, the entire property had been transferred to Janice, as a result, no capital gains tax (CGT) was due because they were married.
After selling the property in 2021, they were eligible for a full relief because the property was used as their ‘main residence’ and not used for business purposes during Janice’s period of ownership.
Our in-house team of professional tax accountants are always there to guide you if you have any queries related to the impact of the propositions suggested by HMRC on capital gains tax (CGT) and Principal Private Residence relief.
Clear House Accountants are professionally trained and qualified accountants in London with years of experience gained working with clients from a variety of backgrounds. Our in-house team of accountants have a large number of specialist tax provider who will guide you in creating smart solutions for complicated tax issues, and provide tax planning solutions that will help you in identifying potential tax relief claims making sure you keep more of your money.
Jinesh is a Senior Business Accountant, with a masters in Finance from Westminster University, and specializes in tax and accounting for small to medium businesses with a turnover less than £ 3 Million.
He specialises in helping creative businesses understand and manage their accounting and tax needs and obligations.
As accounting ecosystems evolve, their potential to add value also grows. This has increased the focus on digital solutions to tackle complex business problems. Jinesh helps businesses see the opportunity in this and helps businesses become more efficient and increase performance, using the right solutions.
Some of the key things he focuses on are:
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