Major changes coming to tax on private residences
HM Revenue & Customs (HMRC) recently published their proposals to start charging Capital Gains Tax (CGT) on non-resident individuals selling UK residential property for a profit from April 2015.
By bringing non-residents into the CGT charge for UK residential property, it followed that a review of the Principal Private Residence (PPR) relief rules was also required in order to avoid any perceived abuse of the ability to nominate a residence for tax purposes.
The new rules from April 2015
Some feared that the PPR relief changes proposed earlier in the year, ahead of a consultation period over the summer, would lead to onerous record-keeping obligations placed on taxpayers (highlighted in my April Yorkshire Post article). Thankfully, the recently published rules have been revised and the feared administration burden reduced. Under the new rules from April 2015, a person’s private residence will not be eligible for PPR relief from CGT for a tax year unless:
- either the person making the disposal was tax resident in the same country as the property for that tax year, or
- where not tax resident in the country, the person, or whose spouse or civil partner spent at least 90 midnights in that property (or across all of their properties in that country) in that tax year.
A taxpayer with more than one residence can still nominate which property should benefit from PPR relief provided:
- they are UK resident with more than one home (in the UK or overseas), or
- they are non-resident but spend 90 midnights in one or more UK homes
How will it impact on UK residents?
The good news for UK residents with UK residences is that nothing has changed, meaning the long-established practice of ‘flipping’ PPR relief between two UK properties can continue.
But for UK residents with holiday homes overseas, unless they spend at least 90 days per year living there, they will not be able to claim PPR relief on that property. If they are able to pass the ‘90 day rule’, then they can nominate which property is treated as their main residence.
How will it impact on non-residents?
The new ‘90 day rule’ is clearly aiming to restrict PPR relief to situation where the taxpayer can demonstrate having a significant presence in the UK, so non-residents buying UK property as an investment rather than as a home cannot benefit from PPR. This certainly seems a reasonable approach to take.
However, non-residents spending more than 90 days in their UK property (or across all their UK properties) will see their chances of becoming UK resident increase (under the new Statutory Residence Test rules introduced in April 2013). This in turn will very likely have a significant impact on their wider UK tax exposure.
So very careful planning will be needed to ensure that non-resident individuals do not inadvertently become UK resident whilst trying to obtain the benefit of PPR relief.
Admin and timing
Interestingly, UK residents must notify which residence is to qualify for PPR relief within two years of a change in the number of their residence (as the rules were before), whereas non-residents are required to notify at the date of disposal.
It is important to note that for the PPR relief changes, periods prior to April 2015 will be taken into account – i.e. properties that have benefitted from PPR relief prior to April 2015 will have their full ownership and PPR history taken into account when calculating the relief on disposal.
What action do I need to take?
These recently published proposals do not provide all the detail we need to consider all scenarios, so we look forward to seeing the Government’s draft legislation in early 2015.
For now, it is important to review your property situation and take advice. People with more than one residence, whether in the UK or abroad, need to review their position and consider how these new rules will impact on the chances of them obtaining PPR relief. In particular, UK residents with holiday homes and non-residents with UK homes need to plan very carefully if they are to obtain PPR relief on those properties.
Richard is a Tax Consultant at Garbutt & Elliott and a Chartered Tax Adviser, specialising in personal and employment taxation matters.