Private Residence Relief and Capital Gains Tax
Posted: Oct 31, 2015
Even if you are not familiar with the term Private Residence Relief (PRR) it is likely that, if you are a UK resident, you know what it means in practise; and that is simply that you will not have to pay capital gains tax (CGT) when you sell your own home, not matter what level of profit you might make on it. This is perhaps one of the main reasons why people with large amounts of equity in their homes are usually so pleased – many see it as pure profit that will never be taxed.
Of course, with the property slump during the recession this was talked about far less than it was prior to the recession (unless you happened to live in London where house prices in many high-end areas seemed immune to the slump) but as property prices seem to be on the rise again in many areas it has become a common topic of conversation again.
PRR only applies to the sale of a main residence by individuals and not by companies. However, where a property is held in trust for one or more parties and is the main residence of the person or persons benefitting from the trust then the trustees are also able to sell the home and the trust can benefit from the same tax-free arrangements concerning the profit made as if it was owned by the individuals themselves.
In broad terms there can also be an agreement between two parties regarding a property that may not be in the form of anactual trust but, for tax purposes, would be treated as such, and this is classified as a "settlement". A settlement is an agreementthat means the owner of a property benefitsfrom no CGT on the sale of the property in question even if it is not their main home.
There are some specific requirements that must be met when the property is held as a settlementto benefit from the PRR regulations so always talk to a tax advisor or accountants in london to ensure you are in compliance.
Settlements are often used when a property is the residence of a family member, but not owned by them. So parents may have purchased a student flat for their child, or an adult may have purchased a home for an elderly relative, with an attached provision allowing the relative to live there rent-free for as long as they choose. The exact details of the settlement are relevant to the tax authorities so, for instance, if the real owner has agreed to be responsible for maintenance and repairs this can affect how the property is treated on disposal.
Another consideration is that of "bounty" which is when a property is purchased by one relative from another relative at a lower price than it would be expected to achieve on the open market. If the property was purchased from the person who is now living there rent-free then that would also have an impact. Again, always take the advice of a tax advisor or chartered accountant in north london if you have any complicated arrangements regarding property ownership both before you purchase and before you subsequently sell.
The author has written and published articles on a wide range of topics including Small Business Advice, Tax and Accounting, Interior Design, House Renovation and Project Management.