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TaxationWeb by Jennifer Adams

This article delves deeper into the Principal Private Residence exemption and shows that it is not as straightforward a claim as is first thought.We are so used to saying that the sale of a Principal Private residence is CGT-free that we are in danger of forgetting that two conditions have to be fulfilled in order for that to be so:-

1. the property must not have been purchased for the sole reason of making a profit and

2. that to be exempt the property (dwelling house) must be an individual's only or main residence throughout the period of ownership



There is no definition in the legislation as to exactly what constitutes a dwelling house but in Batey v Wakefield (1981 STC 521) it was decided that "residence" includes not only the main building but also any other buildings that are occupied for the purpose of the main residence (e.g. shed, summerhouse, staff bungalow). Many Cases have followed hinging on the question as to whether a separate property on an estate could be exempt when sold and the Revenue have confirmed that in deciding whether a property is exempt they look to such pointers as the geographical location of the two buildings to each other.



Exemption also extends to gardens and grounds of up to half an hectacre (inclusive of the house itself). Again, the Revenue view a garden as an enclosed piece of land for cultivating flowers, fruit or vegetables and not used for other purposes (e.g. agricultural use.) A pitfall can arise when an occupier sells only part of the gardens with the house as was found in Varty v Lynes

(1976 STC 508) where a property and part of the gardens had been sold, then on the subsequent sale of the remaining grounds no exemption was allowed; the reason being that at the time of disposal the garden was no longer attached to the residence (the house being already sold!) The only instance where the Revenue will allow the second piece of land to be tax free on sale will be when the land has no development value - this concession is virtually useless unless the land is a bog, as all land has potential for development value of some sort. The only reason for selling a house separately from the land would be the prospect of developing the remaining part at a later date!



The PPR exemption is for one property per person only; so if another is acquired an election has to be made as to which property is to be covered and which is not. The election must be made within 2 years of the date that the situation arose and if one house is replaced then a new 2 year period begins. The owner must actually reside in both properties for some time at least and any period of ownership not elected as the PPR will obviously be chargeable.



The situation becomes complicated on marriage many couples being unaware of the potential CGT bill due when one of them comes to sell. As a married couple live together, they are treated as one person, so in the increasingly usual situation where, on marriage, each party owns his or her own property, the election has to be made within 2 years of the marriage as to which residence is the main qualifying one - and the election has to be made by both. As many couples are unaware of the need for the election to be made, they miss the cut off date and when the Inland Revenue become aware of the situation then they decide which property is covered on facts presented and the couple cannot choose. It should be remembered that a husband and wife each have their own separate annual CGT exemption and each can use the 20% savings rate on gains to the extent that income does not exceed the basic rate. Hence, on an eventual sale of a non-PPR property, joint ownership could reduce or extinguish any CGT due.



There is no minimum period of occupation for PPR but the house has to be occupied before and after any period of absence unless the reason for the absence was that the owner was working away; then he does not have to go back to the house if his work subsequently requires him to reside elsewhere. If the reason for the absence is work abroad then any period of absence no matter for how long is allowable. If work just takes him elsewhere within the UK then the rules are not so lenient - he is only allowed an absence of four years.



Some relief is available for all these unusual circumstances in that the first year and the last three of ownership are always treated as periods of occupation, irrespective of whether actual occupation takes place. This valuable exemption helps to cover situations where it takes a long time to sell a house and find somewhere else to live.



The three year exemption is extended indefinitely in the situation where a married couple separate otherwise without exemption problems could arise where one spouse leaves the property and conveys the interest to the other at a later date. Leaving the property means that the house is no longer his PPR and until the conveyance takes place the leaving spouse is still deemed to have an interest; hence a potential CGT liability. ESC D6 deals with this problem so that it does not matter whether the conveyance takes place in the same tax year as separation or later - no CGT is due.



Similarly, another concession, D46, extends the first year rule. Where an individual either buys land and builds a house on it, living somewhere else in the meantime or arranges alterations on a house before moving in, then he is regarded as being in occupation provided that the work is completed within 12 months. In exceptional cases the 12 months can be extended to 2 years. He has to occupy the property after the works are completed but the concession has been the subject of misuse even after the giving of this restriction. There are some who repeatedly self - build houses, each time living in the property for a while after building has finished and at the same time they embark on the building of another house. The taxman will tolerate these "serial self builders" but for only so long before they are then deemed to be developers and are taxed as such.



Should any Chancellor decide to abolish the PPR exemption he will save the Exchequer approx. £120 million per annum. However, despite being a significant amount, the political impact would outweigh any benefit of increased tax revenue and on balance the exemption will probably remain in place for some time yet.