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Taper Relief and Private Residence Relief

What was the order of set off when both Taper Relief and Private Residence Relief applied

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My client has advised that a former residence was sold in December 2006 in respect of which only part of the period qualified for the Private Residence exemption.

I have increased the base cost with the addition of indexation to April 1998 but cannot then recall which relief then came next, taper or private residence.

I appreciate that this is fairly academic as the result is the same, but I would like to present the information to HMRC in the correct order.

Many thanks for your help.

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By Tax Dragon
30th Apr 2019 13:16

PPR first (as it's an exemption, not a relief).

Are you sure indexation is due? 2006? Sounds a bit recent, but memory may be failing me.

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Replying to Tax Dragon:
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By Vile Nortin Naipaan
30th Apr 2019 13:27

Surely PPR being an exemption, rather than a relief is a reason to apply it last, with the relief being part of the calculation of the gain before applying the exemption?

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Replying to Vile Nortin Naipaan:
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By Tax Dragon
30th Apr 2019 13:49

D'you know, my fingers bashed out an instant answer, then I went for a lunchtime walk and thought "... what did the little fellows write?"

What s223 says is "Where subsection (1) above does not apply, a fraction of the gain shall not be a chargeable gain..." So it's not really either an exemption or a relief. It's excluding part of the gain from CGT. The bit that's left is chargeable - and reliefs etc might apply to that part.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
30th Apr 2019 14:02

Taking the PPR exemption first might also maximise any lettings relief due (otherwise such relief might be restricted to the already tapered PPR element).

I also seem to recall that there was an apparent anomaly where mixed business/non-business taper rates were in point (where the property was used only for PPR and trade purposes) - effectively an element of non-business taper relief applied to what was entirely the business element of the gain.

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Replying to Wilson Philips:
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By Tax Dragon
30th Apr 2019 15:57

Neither I nor my fingers had stopped to think whether it could make a difference. We just gave the rule as we understand it.

But you're right, it does matter. Eg £200k gain, 50% PPR, max lettings, taper say 25%.

1) PPR first: (200 – 100 – 40) x 0.75 = 45
2) Taper first: 200 x 0.75 – 75 – 40 = 35.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
30th Apr 2019 16:19

You may well be right. I hadn't really thought it through, particularly as to exactly when lettings relief is deducted. I think I had it in my mind that it would come off last, after taper, but your calculations are probably the correct treatment.

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Replying to Wilson Philips:
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By Tax Dragon
30th Apr 2019 16:50

Ah OK, I see what you mean. That hadn't occurred to me (I just 'lumped' s223(4) in with s223(2) with no thought… we're not doing very well here are we? :))

I guess s223(4) is less clear (I never have understood what "a chargeable gain by reason of the letting" means). But I'd be surprised if it didn't work as per my lumping; ss4 still operates by excluding part of the gain from chargeability.

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Replying to Wilson Philips:
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By Tax Dragon
01st May 2019 10:26

Clarity came to me overnight: it's obvious that sss2 and 4 work the same way. Both act to determine which part of the gain is a chargeable gain and which part is not.

I've also realised that I will understand the "by reason of" clause come April 2020. (One wonders whether HMRC has ever properly understood that clause... but best not to wonder too hard, methinks!)

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