For individuals not trained in tax, it is easy to assume that when you sell your ‘home’ there will be no tax charge to consider. Tax experts know that this is not always the case, particularly where a client owns several properties.
Claiming PPR Relief
HMRC often look towards incorrect PPR relief claims as a way of picking up unpaid tax. Legislation for the relief requires not only ownership of the property but residency. Residence is required at the property for a sustained continuous period although, the length of that period is not defined (see 10 week PPR relief). Periods of absence are allowable, but these are within strict guidelines and will change from April 2020. Making sure clients and advisers are up to date with the changes is essential to avoid potentially expensive CGT liabilities.
Potential Issues
Failing to re-occupy the house after a period of absence is one trap. Clients can receive relief for the following periods of absence;
- 3 years for any reason
- Any period where the absence was a result of overseas work
- 4 years due to UK work commitments
Qualifying periods of absences will only apply where the client has occupied the property before and after the period of absence. By not re-occupying the property post the period of absence, no relief will be given for the time spent away. The only exception is if absence is due to overseas employment, or work-related reasons for UK work, and return to the property was prevented by situation of work or conditions of employment.
Extended periods of absence aren’t covered by the absence for work exemption. For example, your client is allowed up to three years away from a main residence for any reason, as long as they don’t acquire a main residence elsewhere. Go beyond this limit and the property becomes taxable.
Finally, ensure the use of the property amounted to residence. Several tribunal cases have been lost because merely occupying property is not sufficient.
Being Proactive
Ensure that your clients inform you of any potential sales of their PPR so you can explain how PPR relief is applied. Review the periods of occupation to identify if there could be a potential capital gain arising. Minimise exposure by disclosing sales to HMRC, using the white space on the tax return.
Should tax be payable on an undisclosed sale of a main residence, there is a 20-year assessment window. A full disclosure will reduce the enquiry window to twelve months from the filing date of the return. It also puts the onus on HMRC to prove careless or deliberate error, before it can re-open the case.
