Maximising principal private residence exemption

Principal private residence (PPR) exemption can be a very valuable tool in reducing capital gains for clients who own more than one property. So how can you make sure they are maximising their relief?

Firstly, the key thing to remember when using PPR relief is that the residence on which it is being claimed must at some point have been an actual residence where the claimant has lived.

1. Make an election
An election can be made within two years of acquiring two residences. It is important to do this for protective purposes and it can save a lot of hassle later on. Once an election is made it can be varied. If no election is made then which residence is the residence on which PPR relief can be claimed will come down to the facts. It may be worth putting a note on your year end tax planning to check whether clients have acquired a new residence in the year, otherwise a valuable tax planning opportunity could be lost.

Once an election validly is made it is conclusive. However, HMRC will not comment on the validity of an election until a claim is made.

2. Evidence
This is important if HMRC query any exemption claimed and is very important where no election has been made or where the facts are disputed.

Ideally this needs to be in place before the disposal. Assembling a convincing case as an afterthought is very difficult and there have been several recent cases where taxpayers have lost out on significant amounts of relief because the facts did not stack up.

The available evidence needs to point towards the residence on which exemption is claimed as being the taxpayers main residence. So questions HMRC might ask:

1. How much time did the taxpayer spend at the property? (consider what gas, electric and telephone bills might show to be the case!)
2. Where is the taxpayer registered with a doctor, dentist etc?
3. Where do his/her children go to school?
4. Where is his/her car registered and insured?
5. Where are they registered to vote and where do they pay undiscounted council tax?
6. What is the address on their driving licence, passport application, loan applications, bank statements, credit cards?
7. Where does he/she keep his most important possessions for example photographs, heirlooms etc?
8. Where have HMRC corresponding with him/her during this time?

3. Revenue sanctioned planning
Once an election is in place it can subsequently be varied. This ‘flipping’ is what caused so many problems for MPs during the expenses scandal. An example of how to do this used to appear in the CGT manual. This has now been removed however the principle remains.

The election can be varied and the variation can be backdated up to two years. The example that used to appear in the HMRC manual varied the election for a week. This can give the last 36 months relief on the second property losing only one weeks PPR relief on the first residence. This is very valuable planning and as the variation can be backdated, it can be varied after the sale. You may want to add this to your standard tax planning checklist where a client has a gain on a property to ensure this is not missed.

4. Remember to use the exemptions
In theory these look quite generous and include:

1. The last three years in any case
2. Any period of up to three years
3. Any period when the taxpayer was employed abroad
4. Any period of up to four years where prevented from living in the property by virtue of employment.

However, b) – d) require actual occupation before and after the period of absence and the taxpayer must not have another residence which qualifies for relief during the period. This latter point is often overlooked and needs to be carefully considered. HMRC take the view that even a short lease can infringe this rule, though a mere licence does not. For this reason it is better for an employer to provide accommodation if the employee is required to live away from home rather than for the employee to take a lease on a property.

If job related accommodation is occupied on anything more than a licence the taxpayer should make an election in favour of his main residence.

5. Lettings relief
If the property has been let at any time as residential accommodation then lettings relief may also be available. This is a very valuable relief and can be worth up to £40,000 per owner. The relief is the lower of the gain attributable to the let period, the PPR relief due and £40,000. This can often exempt a large part of the gain.

6. Spouses and civil partners
Spouses and civil partners can only have one PPR between them. This does seem inequitable in modern times, however, the flip side is that transfers can be made between spouses under the nil gain/ nil loss provisions to facilitate planning before sale. For example, if one spouse is not a higher rate taxpayer, an inter-spouse transfer of part of the property before sale could mean more gain taxed at 18% instead of 28%. Similarly if one spouse has capital losses available a transfer may be advantageous.

However, there are pitfalls to beware of. If there is a mortgage attached there may be a charge to SDLT. If there is a claim for lettings relief to be made, this cannot be made by a transferee spouse who had no interest in the property at the time that it was let. You need to consider all of the circumstances before recommending any planning.