Tax & Accounting News

Principal Private Residence Relief

29/09/2009

Profits made on the sale of a single property, which has been used throughout as the sellers’ main residence and was bought as a home rather than an investment, have long been exempt from Capital Gains Tax (CGT).

Where a property has been let, a claim can be made for Principal Private Residence Relief. This relief was brought in during the recession of the early 1980s to help people who were forced to move from depressed areas to find work and could not sell their homes at the time. It meant they could rent out their property until the market recovered, and still not be taxed on the proceeds when a sale did eventually take place.

In such circumstances, the gain during the period of letting will only be chargeable to CGT if it exceeds whichever is the lower of the relief attributable to owner occupation, the gain during the let period, or £40,000 in total.

Where a house has been owner-occupied for only part of the period of ownership, the seller will qualify for a partial exemption on any profit, based on the length of the periods of occupation and non-occupation. However, some periods of absence are not counted, provided the home was occupied before and after and no other residence qualified for relief during that time.

Individuals who own more than one house can select which house is their ‘principal’ residence – a practice recently exploited by some MPs who were caught ‘flipping’ their principal home designation to save on CGT.

‘Flipping’ involves forgoing a short period of CGT relief on the owner’s main residence in order to get relief from CGT on a second property. Even if the designation is flipped back almost immediately, the second property will then benefit from relief on three years’ worth of gains.

Despite the tax benefits flipping gave to second home owners, it had proved fairly uncontroversial until this year’s furore surrounding its use by MPs. It may be that, as a result, the rules surrounding it may be changed at some point, but for the time being it is still a perfectly legal tax loophole which ordinary citizens can take advantage of.

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