On the 20th of May this year, the Office of Tax Simplification released a report on “a range of key practical, technical and administrate Capital Gains Tax issues”. The report deals with a large range of tax-related issues, claiming to comprise, along with a prior report, “the most comprehensive review ever conducted of [Capital Gains Tax] and the practical experience of those who report or pay it”. Unsurprisingly one of the issues raised was the confusion that often surrounds Private Residence Relief (PPR) and the quirks and foibles which make the system obtuse to work with and daunting to those who do not interact with it on a regular basis.
"...PPR is obscure and confusing for those dealing with it regularly and relatively unknown by those who don’t..."
For those who don’t interact with this relief regularly, PPR (also known as main residence relief) is, in short, the relief from Capital Gains Tax on an individual’s primary residence, provided that certain conditions are met. These conditions include the grounds and gardens of their home not exceeding a certain size, no part of the home having been used exclusively for business purposes, not having been absent from the home for longer than a statutory allowed period during your occupation, and that the property was the taxpayer’s ‘main residence’ throughout the period in which they owned it.
This last point is key because where a taxpayer has multiple homes, they must nominate one as their ‘main residence’ or leave the matter to be decided as a question of fact. This is so even in circumstances where only one of those homes would be able to qualify for PPR, such as where the second home was a rented property and not fully owned by the taxpayer. Without a nomination, you could therefore end up in a situation where the PPR is applied to an ineligible property, and CGT is payable on the sale of the home you own. For many taxpayers and some property advisers this would come as an unwelcome and unexpected surprise. To further complicate matters, if there is any of a number of changes of circumstances, such as a marriage, civil partnership, separation, or a change in the combination of residences in use, a new nomination must be made within two years. A veritable smorgasbord of pitfalls for the unwary!
The OTS acknowledges the necessity of the nomination system. A system based on true occupation would be difficult to enforce and expensive to administer, but the consequential difficulty where the acquisition of a residence of negligible capital value, but which nevertheless could qualify as a main residence, triggers the requirement for a new nomination can have potentially disastrous results for an unsuspecting taxpayer. ‘Unsuspecting’ seems to be the norm - of the second home owners surveyed, only 33% claimed to have made a nomination for PPR purposes.
The OTS report has identified a number of “challenges” with the approach currently taken to a number of areas within PPR. These range from practical considerations to unexpected/unintended discrepancies in the function of the law. While the general scope of PPR is considered to be “generally fit for purpose and adequately supports its policy objective”, situations such as those where a taxpayer builds a house in their garden and then moves into it can lead to unexpected and undesirable tax consequences.
On a more practical level, the OTS notes that the government’s online Single Customer Account cannot currently be used to make PPR nominations, which might be thought an obvious feature to include and this is flagged as a priority for future action. There are problems with the guidance provided by HMRC in this area. Some definitions and guidance in HMRC’s manuals are outdated or unreflective of the current state of the law and society. Specifically, OTS draws attention to the definitions of ‘lodger’ in the manual, which includes outdated requirements such as taking meals together with the homeowner’s family, no longer seen as an ordinary event. It also lacks any examples of the increasingly common phenomenon of home offices which do not undermine eligibility for PPR despite frequent use for business purposes.
There are a number of suggestions to help combat the weaknesses identified in the system. With regards to building and then moving into a house in your garden, the OTS suggests adjusting the start date of the ownership period for tax purposes. Estate agents and conveyancers could be obligated to provide information on PPR nominations to purchasers of new properties. Although given the significant burden already shouldered by conveyances particularly around advice on stamp duty land tax, but also drafting to accommodate the increasing complexity of the taxation of land, this suggestion may raise some alarm bells.
Finally, the OTS notes that both Stamp Duty Land Tax and CGT use definitions of ‘Residential Property’ that differ significantly from each other. While it acknowledges that these two definitions must exist, it suggests that the government ought to give some thought as to how the confusion caused might be alleviated. Perhaps not exacerbating the problem by using a different definition for the Residential Property Developer Tax might be a good start?
In short it is now official - PPR is obscure and confusing for those dealing with it regularly and relatively unknown by those who don’t. It is perhaps natural therefore that there is a broad brush assumption that the sale of your home is free of tax which inevitably leads to unexpected tax bills and ineffective tax planning. All that remains to be seen now is whether these much wished-for suggestions act as a genie’s lamp or a monkey’s paw.
For now, we have a wake-up call to review and make those critical PPR nominations.