What is PPR and how does it work?
When a property is sold, the seller may be required to pay Capital Gains Tax (CGT) on their gains. CGT is charged at 28% if the seller is a higher rate taxpayer. The amount of gains which is subject to this tax can be significantly reduced if the seller is entitled to claim Principal Private Residence Relief (PPR).
If, during the period of ownership, the property was the private residence of the seller, the amount of gain subject to tax can be reduced. For example, if Paul owned and lived in his property for 10 years (120 months), he would be able to eliminate the entrie gain and would not be affected by CGT.
However, if Paul only lived in the property for 6 years (72 months), he would potentially be liable for CGT on gains made on the disposal. Paul could reduce the gain by claiming PPR despite having been absent from the property for 4 years. In this case, Paul would reduce the gain by 72/120ths on the grounds that for 72 months, the property was his private residence. Furthermore, Paul could claim extra PPR as the final 18 months of ownership automatically attracts relief if the property had previously been the principle residence of the seller. In Paul’s case he could reduce his taxable gain by 90/120ths ((72+18)/120). Given a gain of £100k, Paul would only pay tax on a figure of c.£14k after applying PPR and then an £11k annual CGT exemption. (£14k = £100k gain less £75k PPR less £11k annual CGT allowance).
Tax Planning Point
With reference to the example above, PPR is clearly attractive to an individual selling a property. In Paul’s case, he may only have lived in the property for a few days in order for it to be deemed his principal private residence therefore enabling him to claim the automatic 18 months of PPR.
It may be argued that a taxpayer who intends selling a property, (which has never previousy been their principal residence), may consider living in the property for a short period in order to gain entitlement to 18 months of PPR. HMRC do not place great emphasis on the length of occupancy and instead may scrutinise whether or not the property really was the tapayers ‘home’. If the taxpayer can prove that the property was their home then the gain chargeable to tax can be reduced.
Taxpayers should also consider their entitlement to Letting Relief if, during the period of ownership, the property was let out to tennants.
To discuss these points in greater details, please call Matthew Sharpe on 01724 230 360 or email firstname.lastname@example.org.