Part one of our guide to main residence relief explored some of the key basic rules to bear in mind on the disposal of residential property used as an individual’s main residence. Part two of our guide explores at a high level some additional rules affecting the availability of principal private residence (“PPR”) relief, these cover:
- Where there is a delay in occupying the property due to renovations
- Where a main residence is used for business purposes
- The implications of divorce/dissolution of civil partnership
- Where the property is held in trust
- Where the property is located overseas or held by non-UK residents
Delay in occupation
Part one explained that where an individual is absent from their main residence, the period of absence is excluded from receiving PPR relief unless the absence qualified as “deemed occupation”.
However, it is not uncommon for an individual to acquire a house to be used as their main residence, but there is a delay in occupying it because either i) alterations or redecorations are required to be carried out or ii) they are in the process of selling a previous home.
Under a statutory concession, provided certain conditions are met, the period of where the house is unoccupied can be treated as occupation for PPR relief purposes. The conditions are that:
- The period must not exceed 12 months from the date of acquisition
- The individual subsequently actually occupies the property as their main residence
Where there are “good reasons” for the period exceeding 12 months, which were outside the individual’s control, the period treated as occupation may be extended to 24 months. What constitutes a good reason is at the discretion of the HMRC inspector and will depend on the specific facts. For example, a lack of funding to complete renovations will not typically count.
Business use of main residence
PPR relief can be restricted where part of the property is used exclusively for business purposes. For example, where a room is being used exclusively as a home office, upon a subsequent sale of the property the gain in relation to this will not qualify for PPR relief and will be charged to capital gains tax. Calculating the amount of the gain that applies to a room used exclusively for business purposes is done on a just and reasonable basis and not simply apportioned based upon the total number of rooms in the property.
However, if a room is used partly for business purposes and partly for residential purposes, then PPR relief would still be available in full, provided all qualifying conditions were satisfied. For example, the kitchen of a main residence may be used to bake made to order cakes and also used to prepare meals for the resident owner and their family.
Implications of divorce/dissolution of civil partnership
Spouses/civil partners are treated as a single unit and can have only one main residence between them for the purposes of PPR relief. It is not possible for both individuals to each own a property and elect for the different properties to be their own respective main residences and benefit from PPR relief.
The ending of a marriage/civil partnership, where commonly one individual moves out of the family home, can result in PPR relief becoming unavailable for part of the ownership period. Some common scenarios in this situation are detailed below and the impact upon PPR relief explained:
- Where the family home is sold to a third party within 18 months
In this scenario, one individual leaves the family home and so the house is no longer their main residence for PPR relief. However, if the property is sold within 18 months from the date they left, they would still be able to claim PPR relief in full, as the last 18 months of an individual’s ownership is treated as deemed occupation.
- Where the family home is sold to a third party after 18 months
The facts are the same as in scenario 1, except that the family home is sold after 18 months. Although the last 18 months of ownership will still be treated as deemed occupation, the additional months of absence will not qualify for PPR relief and so a capital gain may arise upon the sale.
- Where one individual transfers their interest in the family home to their former spouse
In this scenario, one individual leaves the family home and their interest in the property is subsequently transferred to their former spouse/civil partner as part of the financial settlement. In this case, the property would continue to be treated as the main residence of the individual up to the date of transfer; provided that the property has continued to be the main residence of the former spouse/civil partner throughout this period. This would not apply if the individual had elected for another property to be treated as their main residence in this period.
Property held in trust
Where a residential property is held in trust and a disposal of the property is made by the trustees, PPR relief may be available if the property has been occupied as the main residence by a beneficiary entitled to do so under the terms of the trust.
The occupying beneficiary would need to demonstrate either actual or deemed occupation, which was explained in part one of our guide.
Overseas property and non-UK residents
As mentioned in part one of our guide, an individual can elect for a residential property situated outside of the UK to be their main residence for PPR relief purposes. In order for this to be a valid election, the individual must either be tax resident under the local laws of the country the property is situated in or occupy the property for at least 90 days during the tax year.
A day counts towards the 90 day test, if the individual (or their spouse/civil partner) is present at the property at midnight. Time spent in another property owned in the same country can also be applied towards the 90 day count, so that the total days in all properties in that country are aggregated.
Prior to 6 April 2015, non-UK residents were exempt from capital gains tax on the disposal of any assets, including UK residential property. However, since this date, capital gains tax is payable by non-UK residents in the same way as UK residents on the disposal of UK residential property.
In order for a non-UK resident to claim PPR relief on a residential property owned in the UK, the property must be their main residence and they must spend at least 90 days occupying that property (under the same rules discussed above for overseas property).
However, where PPR relief is not available on a UK residential property, UK capital gains tax will only be due in respect of the increase in the property’s value from 6 April 2015 onwards meaning any growth in value prior to this date is not charged to UK capital gains tax.
Any disposal of UK residential property by a non-UK resident will result in a non-resident capital gains tax return being due to HMRC within 30 days of completion. Any claim for PPR relief must be made on this return.
Whilst every effort has been made to provide information current at the date of publication, tax laws around the world change constantly. Accordingly, the material should be viewed only as a general guide and should not be relied on without consulting your local KPMG tax adviser for the specific application of a country’s tax rules to your own situation.
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