Changes to Principal Private Residence relief for sales of residential property: a foreign element
From 6 April 2015 any individual, whether UK-resident or non-UK-resident, owning property in the UK and abroad, will need to ensure they comply with the new rules if they are to benefit from the relief when selling their PPR
On 15 December 2014 the Government issued draft legislation to implement the extension of the Capital Gains Tax (CGT) regime to non-UK residents, set to be introduced in the Finance Act 2015 and become law from 6 April 2015. Under the current CGT regime, when a non-UK-resident individual disposes of residential property situated in the UK, there is no charge to UK CGT on any capital gain. However, from 6 April 2015, non-residents will be subject to CGT in the same way as UK residents.
In making these changes, the Government has also had to consider changes to one of the most favourable reliefs from CGT – Principal Private Residence relief (PPR). PPR relief provides relief from CGT on capital gains made on the disposal of an individual’s only or main property and is potentially a very valuable relief. Where an individual owns and occupies (or has occupied at some stage) more than one property, they are able to elect which property is treated as their PPR. Without changes to PPR relief, when the new CGT rules take effect, non-residents with UK residential property would be able simply to elect for that property to be their PPR and to avoid the new CGT charge on the sale of the property.
The new legislation acts to block this obvious loophole but, in doing so, it also has a wider-reaching impact. From 6 April 2015, any individual, whether UK resident or non-UK resident, who owns property in the UK and abroad, will need to ensure that they comply with the new rules if they are to benefit from the relief when selling their PPR. On a positive note, after consultation with practitioners, the Government has now dropped the idea of abolishing PPR elections altogether, as we reported in the April 2014 update.
The new regime
The rules apply equally to a UK resident individual who owns property abroad and wishes that foreign property to be their PPR, or a non-UK resident individual owning property in the UK who wishes their UK property to be their PPR.
From 6 April 2015, any property owned by a UK or non-UK resident individual can qualify for PPR if it is located in a territory in which the individual is ‘tax resident’. However, where the property is located in a territory in which the individual is not tax resident they must satisfy a new ‘day count’ test in relation to the property.
Since April 2013, the UK has had a Statutory Residence Test, which will apply here, to determine UK residence. For other territories an individual will be treated as tax resident if they are liable to tax in that territory above and beyond income tax on income sources in that territory and or capital located in that territory.
If the individual is not tax resident inthe territory the new day count test applies so that the individual (or his legally registered partner) must spend at least 90 midnights in the property in the UK tax year (between them). Time spent in another property owned in the territory can also be applied towards the 90 day count so that the total days in all properties in the territory are aggregated.
Points to consider
As with the current rules, an individual has two years from the acquisition of the second property to make an election for PPR, but now only as long as the new conditions are met for that property.
Where a previous election has been made in respect of a property but, from 6 April 2015 that property no longer qualifies for PPR because the residence and day count tests are not met, it will be necessary for a new election to be made for another property, prior to 5 April 2017, to avoid PPR being wasted altogether.
It may be necessary for individuals to seek advice on whether they are ‘resident’ in a territory in order to know whether the day counting rules apply.
Relief for the last 18 months of ownership continues to apply in all cases where the property satisfies the test for PPR. Some other periods of absence from the property will also be allowed, mainly where absences is as a result of work relocation.
