Private Residence Relief and deemed occupation

If you sell a property that was your main residence at some point during your ownership, you may be eligible for private residence relief (PRR) which can reduce or eliminate your capital gains tax liability. However, there may be periods when you were not living in the property, such as when you moved out before selling it, or when you let it out to tenants. In this blog post, we will explain how you can claim PRR for periods of non-occupation and what conditions you need to meet.

The basic rule is that you can claim PRR for the period of your actual occupation, plus the last 9 months of ownership, regardless of whether you were living there or not. This is to allow for some flexibility in case you have difficulties selling your property or buying a new one. However, there are additional reliefs that can extend the PRR period beyond the 9 months. Previously that period of 9 months was 36 months. You could also claim letting relief if you had rented the property during a certain period. Those benefits have been curtailed now but you still can claim relief in some cases where you did not occupy the property. It's called deemed occupation and here are the different scenarii where it's available. 

Final period of ownership

That's the one we just talked about and it is the most common scenario where relief is available despite not being in occupation of a property. Since April 2020 the final period is nine months and those are always available if you have lived in the property as some point (to exclude the buy-to-let properties where no such relief is available). The intention of the exemption is to aid sellers who are having difficulties finding a buyer. This is regardless of having difficulties finding a buyer or the use of the property during that period. 

Delayed occupation

Another scenario where a period of non-occupation will be treated as a period of occupation is where there is a delay in taking up residence of a dwelling. The following conditions must be satisfied:

• occupation of the property happens within two years of purchase;
• the property was not another person’s residence during the period of non-occupation; and
• a qualifying event happens during that period of non-occupation. A qualifying event can be a delay due to the completion of construction, renovation, redecoration of the property, or because the individual can't move in until he disposes of his previous residence.

Changes in off-plan treatment for PPR relief

Principal property relief (PPR) sometimes also called private residence relief (PRR) saw its usefulness seriously curtailed following a recent decision of the Upper Tribunal (UT) that overturned a First-tier Tribunal (FTT) ruling of 2017. The issue at stake is how to determine the date of acquisition of an off-plan property and the new ruling means that property owners should be very cautious when they purchase off-plan their principal residence.

PPR reduces any taxable capital gain on a property if the property has been used as a principal residence for part of its ownership. The case in question concerned the definition of ownership for the purpose of the relief. HMRC argued that the date of acquisition was the date when contracts were exchanged whereas the taxpayer argued it was the date when he was finally able to occupy the property, three years later. The FTT agreed with the taxpayer but HMRC appealed and the UT decided to side with HMRC.

The UT took the view that even though there was a period when the property was not even a dwelling, it was a chargeable asset nonetheless. As a matter of fact, the taxpayer had the right all along to sell the property and therefore there was no doubt that profit from such a sale would be taxable.

Now, not all is lost in case the delay in taking up occupation is less than a year (2 years at most in exceptional circumstances) thanks Extra Statutory Concession D49 that allows for relief in such a case. But caution should be exercised if you suspect there will be delays in construction as it will now most probably have negative tax implications for the homeowner upon resale.

Annual Tax on Enveloped Dwellings due soon

Announced in the March 2012 Budget, the Annual Tax on Enveloped Dwellings (ATED) return -- called at the time the Annual Residential Property Tax (ARPT) -- is due by October 1st 2013. The corresponding tax liability has to be paid by October 31st 2013.

If all of the following criteria are met, an ATED return is required by 1 October 2013:

• a company (other than a company acting as trustee of a settlement or as nominee), a partnership with corporate partners or a collective investment scheme which holds UK residential property, and
• at least one single-dwelling interest was worth more than £2m on 1 April 2012 or at the date of acquisition if later, and
• the single-dwelling interest was still owned on 1 April 2013

Owning UK property in an offshore company

Until recently UK resident and non-domiciled individuals investing in UK property would have been advised to use an offshore company to hold the title. This not only allowed the owner to avoid the 40% UK inheritance Tax (IHT) but also offered the potential for future buyers to avoid stamp duty (SDLT) by acquiring the company shares rather than property title to the UK property. Perhaps not surprisingly the UK government decided to legislate in this year's Budget to prevent this loss of revenue from residential properties (commercial properties are unaffected).

The draft legislation published on 11th December 2012 outlines the new taxes and charges which will have to be paid by Non Natural Persons (NNP) owning property in the UK. There is already a new punitive rate of Stamp Duty (SDLT) where a NNP acquires a UK residential property for more than f2m (15% instead of 7%). And from April 2013, NNPs owning properties valued in excess of £2m will also be subject to an annual charge (called the Annual Residential Property Tax or ARPT). The charge will be £15,000 for properties valued between £2m and £5m, £35,000 for properties valued between £5m and £20m and £140,000 thereafter.

What tax relief for use of home?

This is a common question and unfortunately, it's a bit more complex than most people think.

Depending on your legal setup, the steps to take to recover some of your personal expenses on use of home are different. For a sole trader, the process is quite straightforward but for a limited company there is a bit more work and paperwork required:

You are a sole trader

You can just deduct a portion of the home cost. The calculation is done as a two step process. First you calculate the total running cost of your home:

• Utilities (Water, Gas, Electricity)
• Insurance
• Rent or Mortgage Interest
• Council Tax
• Maintenance
• Internet and Phone