CGT - possible changes to principle private residence (PPR) rules

Among the predictions from Smith & Williamson partner Richard Mannion is the possibility that principal private residence rules will be tightened with a possible reduction from three to two years forthe  ‘deemed’ main residence.

He explains that once a property has been used as an individual’s main residence, the last three years of ownership will always be exempt from CGT no matter what happens.  The rule was originally introduced to make it easier for people to take up work in a different part of the country and give them time to sell the old home. However, the tax break has, arguably, been financially helpful to many people with a second home which was not the government’s intention.

“Despite changes in the labour market, this tax break has remained in place. And given the ‘noise’ about MPs ‘flipping’ properties, we could see a general tightening of the rules with the ‘deemed main residence’ period being cut from, say, three to two years. However it is very unlikely that any changes will be introduced for 2011/12. It is more likely that we will see a consultation process on proposals for streamlining the relief during the summer with a view to bringing in any changes next year,” said Richard.

His colleague Tim Lyford added that ‘non-resident’ property owners could be brought into the CGT net. Thousands of ‘non-resident’ individuals or entities that own property in the UK, sometimes via a corporate structure currently do not pay tax on any rise in value when these properties are sold.

"It would be a relatively easy decision to bring these owners within the scope of CGT, particularly as generally they won’t be voters, by extending CGT to cover UK real estate. It’s worth noting that if British people own property in France, for example, they are liable to pay a local tax on the gain when they sell and in addition they may be liable to pay an annual wealth tax," Lyford said.
 

Comments
John Stokdyk's picture

Others are backing this horse

John Stokdyk | | Permalink

The PPR reform is a popular tip from the experts: Giles Mooney at TAXtv predicted this too and Baker Tilly's George Bull also flagged it up as a possibility.

What's your view - after all the "flipping" scandals, will MPs have the stomach to tighten the tax rules on PPRs?

PPR Relief

pjhorn | | Permalink

Most taxpayers probably have no idea about the 'last 36-months' rule - or ever need to use it - and aside from instances of 'enforced' two-home ownership where it proves difficult to sell the old home, as we and our clients know, the relief seems to be of most value to second home owners who have made the election in time, those selling a former PPR sometime later, typically having let it in the interim (not forgetting the "lettings exemption" too), and married/C-P couples where one or both them still own(s) a former home.   

Removing or reducing the '36-months' relief could be a very astute move politically, and it would be relatively easy to introduce a different form of relief for the enforced two-home owners. Although it's counter to Conservative ideals, attacking only those with second homes or retained former PPRs would leave the bulk of the population unaffected - and sadly fewer magic tricks in the advisors box! 

The exemption for non-residents directly or indirectly owning UK real estate is an oddity internationally and ripe for reform. It's a fantastic relief for for foreign clients and those who have emigrated - especially if they live in a low-CGT regime.....and, of course, can have IHT benefits too.  The potential impact on the high-end property market in London might be enough to scotch the idea. I haven't come across another country with CGT on property gains that doesn't apply it to non-residents as well as residents - although the rules for each often differ in some way (even in the EU still) and there can be substantial reliefs across the board, such as the French 10% reduction in gain for every year of ownership over 5. 

A very common approach overseas is treating the shares in a company (domestic or otherwise) that predominantly owns local real estate as deemed real estate assets of that country, and subject to tax in the same way as directly-held property (although possibly not for gifts/inheritance tax, if it exists).                

 

 

 

      

 

 

           

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