“The Art of Taxation is to pluck the Goose so as to obtain the largest possible amount of feathers with the smallest possible amount of hissing” – and the converse can also be said of any tax relief. No matter what the actual benefit of the tax relief, provided it is claimed unobtrusively, HMRC will generally allow the relief to continue – partly due to bureaucratic inertia – but normally without a lot of hissing being aimed in your direction. Sauce for the Gander, you might say.
The ability to nominate which of your homes should attract “Principal Private Residence” relief (PPR) against Capital Gains Tax (CGT) has been an extremely useful relief, as it allowed those with more than one home to remove the uncertainty of where the exemption would fall. This is most easily understood from an example: A family grows up in London, prospers, buys a holiday home in Suffolk and in later years spends more and more time in Suffolk to the point where the children start attending school here, with only Dad now spending workdays in the London property where his career is based. Because the family took advice when they initially purchased their Suffolk home, they made a PPR election (at the time on the London property) to remove the doubt as to where their principal “home” was. Having made the election, they could amend it at any time to move the relief to Suffolk if they wished. Except in cases where the taxpayer was considered to be ‘trying it on’, HMRC would usually have taken the PPR election changes on trust, without looking at them in any great detail.
However, this relief came to the attention of the media thanks to certain high profile individuals changing (“Flipping”) their election every few years to maximise the relief available between two or more properties. Why is it such a big issue? Due to the generosity of PPR relief, it not only gives relief for the time actually spent in a property but also gives access to relief for the last 18 months of ownership (reduced from 36 months from 6 April 2014), and opens the door to ‘Letting Relief’, which can potentially provide a further £40,000 of CGT relief per owner for a property that has been let, if it had also qualified for PPR at some point.
As a consequence, HMRC are now considering whether to remove the ability to elect which residence is the main residence for PPR. If this change is enacted from April 2015, which home qualifies for PPR is likely to be ‘based on the facts’ in each case – which could lead to a great deal of uncertainty for families with more than one home.
At the time of writing, these are only initial HMRC proposals, so no detailed information is available yet, and we do not know whether a pre-existing PPR election will be accepted for the period up to April 2015.
So if you are in a position where you may be affected if this is changed, what can and should you do? Taking the latter first, you should ensure that full records are kept concerning where you live, such as how much time you and your family spend in each property, where your mail is sent, where you are on the electoral roll etc. HMRC may even ask to examine your bank and credit statements and fuel bills in the event of a dispute as to where your ‘main’ residence is, so all such evidence should potentially be retained for as long as the homes are owned!
Looking at what else you could do, there is a brief window of opportunity in which you might even wish to take a pro-active stance and, if an election was made at the right time and the figures ‘stack up’, consider selling the property that has the highest gain and which stands to lose the most if PPR is restricted. As always, individual advice should be taken well in advance of any final decision if you think that you might wish to take action.
So even though the proverbial goose’s neck may be about to be wrung for the PPR election by HMRC, there may still be time to avoid the hiss, and sidestep the bite!
For further information on any of the above points or to discuss your tax affairs generally, please do not hesitate to contact Robin Beadle.