Avoiding the pitfalls of Private Residence Relief
By Heather Bright, Partner, Moore Thompson
The sale of your main home / residence may seem like a straightforward and smart financial move, but just like the sale of a rented-out residential investment property, they can also carry significant tax liabilities that need to be accounted for when budgeting for a transaction.
Capital Gains Tax (CGT) can be a minefield for sellers of residential property, as there are rules in place to determine when and how it applies.
Superficially, these regulations are straightforward. Private Residence Relief (PRR) will mean that sellers won’t pay CGT on property sale gains if all of the following criteria are met:
- The property is the seller’s main home and residence
- The property hasn’t been let out fully or partially
- None of the property has been used for exclusively business purposes
- The seller didn’t buy the property initially just to make a gain
- The property (including grounds and outbuildings) total less than 5,000 square metres
This means that the majority of regular homeowners will not face a CGT bill when they sell their house for more than they bought it for.
However, some may be required to pay CGT – sometimes unexpectedly.
A complex issue
The main issue facing taxpayers with regards to CGT is that it is designed to tax gains on what might be thought of as atypical influxes of wealth and, in general terms, the sale of your main home / residence would not fall within this category and would be exempt from CGT via PRR.
However, when a home appears to fall outside of the criteria for this CGT exemption, these transactions typically draw attention from HMRC investigators.
A case in point
A recently highlighted case makes it clear that PRR is not as straightforward as it can seem, and may well lead to substantial penalties without the right support.
Andrew Nunn sold land that was part of his Oxfordshire property to a developer, with the sale officially going through on 7 September 2016. However, in order to take advantage of clement weather and get the development moving, he allowed the buyer to conduct work on the land from the time the sale was agreed in June 2016.
Mr Nunn has recently faced a long-running dispute with HMRC after claiming PRR on the disposal gain – since HMRC challenged the exact date of disposal.
It argued that, since Andrew Nunn had not officially sold his land until September, by which time a significant amount of building work had been done on the site (from June to September), he was no longer personally benefitting from the land for his own occupation – therefore the land was no longer part of his main residence and as such he was not entitled to the PRR relief.
In the end, the First Tier Tribunal (FTT) found in Mr Nunn’s favour as a result of Section 28, Taxation of Chargeable Gains Act 1992 – which states that “where an asset is disposed of and acquired under a contract, the time at which the disposal and acquisition is made is the time the contract is made (and not, if different, the time at which the asset is conveyed or transferred)”.
However, this case’s length and complexity of arguments reveals the need for further clarity when it comes to claiming reliefs on property sales.
Additionally, it demonstrates that tax planning is essential, in partnership with a property expert with an in-depth understanding of the arguments which HMRC could and have made against a particular tax arrangement.
I would urge anyone considering claiming PRR or other tax relief on personal property sales, and who may fall foul of any of the above criteria, to get in touch to discuss how to optimise the situation.
Contact Heather at heather@mooret.co.uk.