Ten Pitfalls when you’re claiming Capital Gain Tax Private Residence Relief
Everyone is aware that one of the most generous reliefs available, at a time when the Government is constantly seeking ways to increase the tax take, is Capital Gains Tax Private Residence Relief (PRR). All you need to do is live in a property. You don’t even have to live in it for the whole period of your ownership, and when you come to sell it, subject to a number of conditions, you don’t have to pay capital gains tax on the increase in value from when you bought it. And this normally applies whether the gain is £100 or £100 million.
Of course, it’s never that easy when dealing with legislation so here are ten pitfalls which we have come across where home owners have received unexpected tax bills.
The legislation gives you a generous half a hectare (1.235 acres) where HMRC will not question the usage of the garden, but if you exceed that, you may need to apportion the cost. Of course if you live in a (say) 10 bedroom mansion, the legislation gives you some leeway so that they will allow relief for all of it if the land area is appropriate to the size and nature of the property.
A common issue relates to where you want to keep hold of part of a large garden after you’ve sold your home with a view to selling it to a property developer. There’s no problem with that part, however, you may be in for a nasty shock when you tell your accountant because the land you retain no longer attracts PRR as, at the point you sold it, it was no longer your home.
You’ve owned your home for a number of years and it has a large piece of land around it (the total area owned is three acres so more than the permitted area of 1.235 acres). Five years ago, you partitioned 1.5 acres of it because you were contemplating selling it but the deal fell through and you’ve just let the land remain fallow with a 6’ fence partitioning it off from the rest of the garden. A property developer has just offered you a significant sum for the fenced off land – the only problem is, it’s no longer part of your garden nor is it essential for the use and enjoyment of your property. You may have to pay capital gains tax on the partitioned area sold.
In recent years, HMRC has made use of some fairly strong case law when dealing with individuals who move into a property, spend 18 months renovating it, sell it then move into another property to do the same thing. Arguably, what they actually have is a trade and there would normally be no right to PRR on the properties sold. From the case law, the test concerns “quality of occupation” i.e. have you moved in with your family – does your post go there, do you have furniture etc. HMRC’s problem is picking up these serial developers out of all of the people who might otherwise have fairly peripatetic jobs which entail them moving house on a regular basis.
PRR reliefs are generous and extend to temporary absences from the property – perhaps for a job move overseas, or to go look after a chronically sick family member. If you eventually move back in, the legislation gives you a theoretical period of deemed occupation of up to 15 years. However, if you fail to move back in, unless you remain in job related accommodation at the point you sell the property, the most you’ll get is three years additional relief. However, if you’ve let out your property in your absence, there may be some further relief due.
You can only claim relief for one property as your private residence during any particular period in time (married couples can only claim relief on the same property). Accordingly, if you own two properties, you might want to consider making an election to HMRC to treat one of those properties as your private residence – usually the one where you are expecting to make the largest gains. If you don’t, HMRC will look at the factual residence and choose one for you.
If one spouse moves out and the other remains in the marital home, provided the outgoing spouse does not file a main residence election with HMRC, if the outgoing partner’s share in the property is eventually sold/gifted to the spouse who remained resident, (s)he can claim PRR for the whole period including the period during which (s)he was not in occupation. However complex divorces can take many years to resolve and the need for both parties to move on to new lives can trump any potential tax consequences of holding on for a settlement.
You live in rented accommodation but you’ve purchased a renovation project which will take 8 years of your weekends and evenings to complete and which you intend moving into once the Grand Designs Team have finished filming. Sadly, none of that 8 years will qualify for PRR as the concession only gives you 12 months as of right and an additional 12 months for circumstances where you are prevented from moving in which are beyond your control. NB – this is an all or nothing concession so if you exceed the 24 months, essentially you get no relief for that 8 year period.
You own a four level property, and two levels house your business where six employees attend each day during your period of ownership. You can’t claim relief on the whole property even though you and your family live on the other two levels. However, you may be able to claim rollover relief or possibly entrepreneurs relief on the business proportion dependent upon the circumstances.
It is possible to get PRR if you leave a property for whatever reason and rent it out. The relief is limited but, under average circumstances can still be valuable. However, it remains incumbent on the owner to actually prove that they rented a property out during the period of ownership and, if the period of rental was (say) a decade ago, such proof may be hard to find. Accordingly, it is important to retain records such as rental agreements to demonstrate that the criteria for the additional relief have been met.
Of course the above list is by no means exhaustive but HMRC has recently demonstrated an appetite for challenging PRR claims and, as with all such issues, the advice to clients should be to plan in advance for anything that may be non-standard such as the intention to sell part of your land. For further information on this, please contact the Croner Taxwise consultancy team on 0844 728 0120