Insights

Important capital gains tax changes – update for property owners

Although we touched upon this change to capital gains tax policy in our Christmas Livewire, we are covering the issue again to ensure all clients are fully aware of the impending change to the principal private residence exemption. There is potentially a lot of money at stake.

When a property owner sells a property that has been their principal private residence (PPR) throughout the entire period of ownership, they do not have to pay capital gains tax on any gains made. Given the rate of property price increases in the past few decades within the London and Surrey area, that is of course very beneficial. 

When a property owner sells a property that has at some time been their principal private residence, they will be entitled to the PPR exemption for the period during which the property was their PPR and also for the last 36 months of ownership, irrespective of how the property was used during those 36 months.

It is therefore possible for individuals to own a number of properties which have each had PPR status at some time during their ownership, and as a result, each of those properties will automatically qualify for an extended PPR exemption.

Where individuals have more than one property which is available for their use, and they reside in more than one property from time to time (which might be the case for example with holiday homes) it is possible for them to make the PPR election on different properties at different times, hence securing a CGT exemption on each of those properties for the last 36 months of ownership.

This can be a significant tax saving when compared with the sale of a property which has never had PPR status, in which case capital gains tax arises on the entire gain at the rate of either 18 or 28%, depending on income levels.

The 36 month PPR exemption has been available for many years, however there was an unexpected announcement in last year’s Autumn Statement that with effect from 6^th April 2014, the CGT free period on a property that was formerly a PPR will be reduced from the current final 36 months of ownership to the final 18 months of ownership.

If you are affected by this reduction in relief, then you may wish to consider selling an affected property before the change takes effect on 6 April 2014. Note that for tax purposes, the effective date of disposal is the date on which unconditional contracts are exchanged; not the date of completion.

For more information on tax planning and property investments, contact Lesley Stalker.