Private Residence Relief, non-residents and second homes
1 May 2024
As the press coverage of the sale of Angela Rayner’s former home in Stockport rumbles on, we thought it would be an opportune moment to re-examine the Principal Private Residence Relief (PPR) rules and the traps for those that live between multiple homes. We also consider how these rules impact overseas clients who are purchasing residential property in the UK.
PPR – A brief explanation of the row
PPR provides homeowners with relief from capital gains tax (CGT)on the sale of their “only or main” residence. The relief contains various conditions relating to the use of the property, the size of any associated grounds and absences from the property, all of which have their own quirks.
However, the maelstrom that the deputy Labour leader finds herself in (or at least the tax component of it) relates to the condition that spouses and civil partners who are living together can have only one residence or main residence between them.
What happens when a couple marry or enter into a civil partnership when they each already own their own property? In this scenario, if both properties would otherwise qualify for relief, the couple can either elect which of the properties should be treated as their main residence for PPR or, in the absence of an election, the main residence will be determined on the facts of the case.
For the purposes of CGT, a couple are treated as “living together” unless they are separated under a court order or by a deed of separation, or they are in fact separated in circumstances in which the separation is likely to be permanent. These rules are important following the breakdown of a marriage since they can allow each partner to acquire their own main residence. However, a couple who are happily married but nonetheless live in separate homes are treated as living together in the eyes of the CGT legislation and can, therefore, only have one main residence between them.
The allegation against Angela Rayner and her former husband is that she incorrectly applied PPR to the gain made on the sale of her home in Stockport. An alternative explanation is that PPR was properly claimed, and that Angela and her former husband elected to treat her house as their main residence. The knock-on consequence of this is that her husband will have paid more CGT on the later sale of his own property. If they both sought to claim 100% PPR on the sales of their respective properties, then it is likely that one or other of them has paid the incorrect amount of CGT.
Non-UK residents
The PPR rules for multiple homes are also relevant for international couples who buy property in the UK. Imagine the scenario where one partner accepts a job in the UK and acquires a property here whilst the other predominantly lives in their existing family home overseas. As overseas homes are taken into account when assessing whether a couple have multiple homes, the couple should make a PPR election if they wish for the relief to apply to the UK property on a future sale.
Further, if neither is a UK tax resident, there is an additional requirement that between them they spend at least 90 days in the UK property for that tax year to qualify for PPR on a subsequent sale. The purpose of this provision is presumably to prevent couples from electing a mere UK holiday home as their only or main residence.
Final thoughts
At first glance, PPR seems an extremely simple relief. It exists to prevent CGT from being triggered on the sale of your main home. However, the complexities of the legislation present potential traps for everyone from unwary politicians and non-residents to members of the general public who buy a second home. As always, we would recommend that anybody who is considering acquiring real estate in the UK takes proper advice on their tax position before doing so, and the International Private Client Team at Birketts is on hand to help.
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Alex Hunt
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Deborah Carrivick
Services
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 May 2024.