Can I make a PPR election to reduce CGT?

Can I make a PPR election to reduce CGT?

Question:

Myself and my wife own two flats which we purchased to primarily provide accommodation for my children whilst at university. We also own the family home.

The family home is currently being advertised for sale and my daughter, and we're also about to advertise one of the flats for sale.

I'm looking into the possibilities to avoid paying capital gains tax on the sale of the flat.

It's been owned for just over 5 years and the expected capital gain is in the region of £100,000.

I've been advised that one option to avoid CGT may be to nominate the flat as our main residence and claim private letting relief on the capital gain. This would be very good for us as not only would we then have full principal private residence relief on our family home but we'd also get it on the flat.

My question is can I nominate the flat as our main residence to avoid capital gains tax when it is sold?

Answer:

Unfortunately you could not simply nominate the flat as your main residence and claim principal private residence ('PPR') and lettings relief.

The nomination applies where an individual or married couple occupy two properties as residences. It then allows them to choose which of the two residences will be the main residence for PPR relief purposes. In order to be a residence actual occupation is always required.

Therefore in your case, your main property is clearly a residence (your main residence), but the flat is not a residence. As such the nomination would not be available.

What you could do would be to dispose of the main property and occupy the flat as your main residence prior to a disposal of this. Providing you disposed of the main property within three years of moving out any capital gain would be fully exempt.

If the flat become your main residence the last 3 years would then be deemed occupation, and you may be entitled to lettings relief which would reduce any remaining gain. Note though that lettings relief would only be due if the flat was actually let (eg under a tenancy). So if it was just occupied by your children with no rentals paid no lettings relief would be due.

In terms of actually making the flat your main residence this is complex and is not defined in the legislation, however the Revenue expect a degree of permanence, therefore occupation for only a handful of days each year would not constitute residence.

Whilst drawn from a different context (in connection with the availability of mortgage interest relief) a Revenue extra statutory concession suggests that a period of occupation of not less than three months is required to establish a property as the only or main residence.

There are no hard and fast rules as to how long to occupy the property before it can be classed as a residence. Some commentators suggest occupying a property for a period of 12 months, although there is no fixed period set by the Revenue and they frequently refer to the 'quality' as opposed to the 'quantity'of the occupation.

It is important to ensure that the residence is genuine. For example the property should be your registered address for the electoral register, and your employers should be informed of the new address.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

Google+

=============================================================

Disclaimer

i) Please note that the articles/answers contain general guidance only and do not constitute accountancy, tax, investment or other professional advice.

ii) The contents of this article/answer are for information only and are intended to assist readers in identify any tax planning opportunities that may be available to them. The information contained in this answer is not intended to be a substitute for taking proper taxation advice and should not be relied upon in this way. Always consult a qualified accountant or taxation adviser. Your situation will then be looked at individually and specific advice relevant to your circumstances can be given. The Expert does not accept responsibility for any loss arising as a result of reliance on any information contained in this answer.

These Notes (and Disclaimer) do not affect your statutory rights in the United Kingdom.