This site is part of the Informa Connect Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 3099067.

Private Client
search
Property

Principal Private Residence Relief: Time to Rebuild?

Posted by on 18 August 2016
Share this article

Principal Private Residence relief from capital gains tax (PPR) is intended to provide tax relief when an individual sells their home - a simple enough premise. However life, and the subsequent tax legislation, is often not so simple. The relief for the disposal of an individual’s main residence contains provisions for a number of different scenarios, including various absences, letting, business use and acreage. Added to this, there is a raft of case law, HMRC guidance, and additional concessions covering further scenarios not detailed in the legislation. The National Audit Office has said that this complexity provides scope for misuse of the relief.

It is worth noting that the cost of any abuse is unknown, as individuals do not have to claim the relief and therefore HMRC is unable to directly monitor its cost. HMRC estimate the cost of the relief based on third party data and remain unwilling to introduce additional reporting requirements, due primarily to the compliance burden placed on taxpayers. This leaves an element of uncertainty which undermines calls for reform, with the amount and cause of any misuse largely unknown.

So is there scope for a refresh of PPR? Simplifying the legislation to make it straightforward to apply would be a good start. There is a respectable argument that the complexity of the current rules will have led many to not declare gains unwittingly on the belief they are exempt. Based on the experience of RSM’s High Net Worth Group, there are a high number of buy-to-let investors who mistakenly believe letting relief, a valuable element of PPR worth over £10,000 of tax per property, is available for their entire portfolio. An individual selling a number of properties during the year could significantly under-declare their tax liability if they didn’t seek advice.

If PPR was scrapped altogether then more tax – anything up to £18bn per year, if estimates are to be believed - would be collectible. But scrapping the relief would be a brave move; public discontent with the housing market is widespread and introducing further costs is unlikely to be popular, potentially preventing mobility across the country as any additional costs could restrict movement for employment, social or family reasons

If a wholesale removal is out of the question, what alternatives might be on the table?  A reinvestment “roll-over” type relief could be more appropriate, providing relief for the element of the gain reinvested into the new home, although this could suffer the same pitfalls of complexity and misuse. A simpler approach may be to exempt only the gain relating to when the property was actually occupied, ignoring exceptional circumstances altogether, although those having to work abroad, or forced to live somewhere else on temporary basis, could find this unfair.

The amount of tax relief provided to taxpayers via PPR is considerable and it is inevitable that it will be under scrutiny as the government seeks to balance the books. However with such a widely used relief comes a similarly broad variety of scenarios it has to cope with. As with many aspects of the tax system there is often no “one size fits all” approach, and what is certain is any potential replacement for the relief would need to be well thought out and well executed to provide a real alternative.

Share this article

Sign up for Private Client email updates

keyboard_arrow_down