Capital gains tax and residential dwellings

Planned private residence relief changes

The Government has announced plans to change the qualifying conditions for private residence relief (PRR) from 6 April 2015 affecting, amongst others, those with overseas holiday homes.

Background

The scope of capital gains tax (CGT) is being extended to gains accruing to non-UK tax resident persons on the disposal of interests in UK residential property. To ensure that the charge could not be escaped by merely claiming the benefit of PRR the rules regarding PRR are being changed.

PRR is given in respect of gains accruing on a disposal of a dwelling house which has been the person's only or main residence throughout the period of ownership. Where this has been the case for part of the period of ownership an appropriate fraction of the gain is chargeable, subject to final period relief (usually for the last 18 months of ownership); relief for certain types of absences and relief if let for part of the period of ownership.

Where a person has more than one residence, as an alternative to deciding based on the facts, notice can be given to HM Revenue & Customs (HMRC) as to which is to be their main residence for PRR purposes. This 'notification' would normally be at the expense of foregoing a qualifying PRR period on another property.

Without changes to the PRR notification rules most non-UK tax residents would be able to nominate their UK property for relief without exposing another property to CGT.

The proposed PRR change from 6 April 2015

The principal change is that a dwelling-house will not be considered occupied as a residence for PRR purposes for a tax year unless the person making the disposal is either:

  • tax resident in the country or territory in which it is located; or
  • if not tax resident the person is present in the dwelling-house, or other qualifying unit in the same territory, for at least 90 midnights during the year (the '90-day' rule). Supplementary changes and definitions
  • Tax resident in a non-UK territory (ie overseas territory) means an individual is liable to tax, by reason of their domicile or residence, on more than just income from sources in that territory or capital situated there.
  • An individual will only be treated as tax resident in the overseas territory if tax resident in the overseas territory for half or more of the tax year.
  • A day counts as a day spent by the individual in the dwelling-house, or qualifying unit, if the individual is present in it at the end of a day.
  • A day spent by the spouse or civil partner in the dwelling-house, or qualifying unit, can also count as a day (but not so that a day is double counted).
  • Where the property is owned for part of a tax year the 90-day rule is reduced by a proportionate amount, but rounded up to the nearest whole day.
  • Where a non-UK tax resident person disposes of a dwelling-house, the use of the property prior to 6 April 2015 is ignored in determining eligibility to PPR unless the person otherwise elects.
  • PRR and 'absence reliefs' (ie in job-related accommodation, temporary period, employment abroad) can only apply to one dwelling-house at any one time. This doesn't apply to the final period (usually last 18 months of ownership) relief.
  • Corresponding changes to the rules for beneficiaries of a trust occupying a dwelling- house under the terms of the settlement and for legatees of a deceased person occupying a dwelling house under an entitlement as legatee.
  • For non-residents, disposals will need to be notified to HMRC within 30 days of the property being conveyed and, unless within self-assessment, the tax paid at the same time. Any PRR nominations by non-residents may be made at this time.

Implications

For UK tax residents with an overseas holiday home there will be less scope to receive an element of PRR from CGT through 'flipping'. From 6 April 2015 the ability to nominate an overseas home as a main residence for PRR purposes will be restricted. Changes to existing nominations and opportunities to make any should therefore be considered before the 6 April 2015.

Returning non-UK tax residents looking to qualify for an absence relief will need to ensure they reoccupy a property in accordance with at least the day count after the absence.

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. © Smith & Williamson Holdings Limited 2015