Understanding principal private residence relief (PPR), in the context of capital gains tax (CGT) is crucial for several reasons, particularly in a divorce scenario.
- Tax exemption
PPR provides a valuable exemption on the capital gains made on a property that is considered the main residence of a couple. This relief can help reduce or eliminate CGT liabilities when selling or transferring the family home with additional land.
2. Limitations
PPR has limitations, particularly for properties with more than one acre of land. The relief may not apply to the entire property, particularly the additional land that is not deemed to be “required for the reasonable enjoyment” of the house, having regard to its size and character. This can often be overlooked by a couple going through divorce proceedings.
3. Mixed use properties
Understanding how PPR applies to mixed use properties is essential. If the family home includes land used for purposes other than private residence, such as rental income or commercial activities, the PPR relief may be restricted.
4. Calculation of the relief
Where PPR relief is restricted (whether through land area or mixed-use property, or a change in configuration), there can be different methods used to correctly calculate the CGT liability, whether this is based upon time usage or a breakdown of land valuations.
5. Optimising strategies
Determining an appropriate method of apportioning gains where PPR Relief may be restricted and identifying any area of land that does not form part of the garden and grounds (where such land is not eligible for PPR Relief) can be very beneficial to help minimise CGT liabilities. It may even be essential work to ensure that you remain tax compliant and avoid inadvertent HMRC penalties.
6. Professional advice
Seeking early guidance from tax advisors, accountants, or legal experts familiar with CGT and PPR rules is recommended to ensure that you can proceed with a sale on an informed basis and to determine an effective strategy to mitigate the potential impact of CGT. It is also essential to be compliant with your tax obligations and hefty penalties can accrue if CGT liabilities are not properly reported to HMRC within 60 days of a sale. Birketts can offer tailored advice on leveraging PPR relief, navigating the limitations and ensuring compliance with tax regulations in a divorce scenario.
Key Contacts
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at February 2024.