CAPITAL GAINS TAX 5

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CAPITAL GAINS TAX 5
Theory and practice of taxation BModule
codeC33TB2Lecture 17

• PRINCIPAL PRIVATE RESIDENCE
• (PPR)

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PRINCIPAL PRIVATE RESIDENCE

• PPR- a taxpayers main residence
• Not chargeable to CGT (and no loss allowable)
• Must actually reside in the property
• If part of the property is used for business
  purposes then that part of the asset will not be
  covered by the PPR exemption.
• Taxpayer has only one PPR.(If he/she owns and
  lives in more than one property, they may elect
  which is to be regarded as their PPR.)
• Married couple may have only one PPR.
• PPR includes garden up to half hectare in area.
  Larger garden may still be exempt if particularly
  large house (what seems reasonable).

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PRINCIPAL PRIVATE RESIDENCE

• If property is a PPR for only part of period of
  ownership, the exempt part of gain is
• Length of period as PPR x whole gain
  Length of period of ownership
• Periods as a PPR and ownership are both measured
  from 31 March 1982 (periods before that are
  ignored.)

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PRINCIPAL PRIVATE RESIDENCE

• ExampleAmos bought a house in June 1978 for
  25,000Market value 31/3/82 35,000Moved into
  new PPR 1/5/98Sold this house 28/2/03 for
  80,000RPI April 98 162.6

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PRINCIPAL PRIVATE RESIDENCE

• Amos Solution
• First calculate gain then consider exemption
• Gain Original
  cost RebasingSales proceeds
  80,000 80,000Less
  Original cost/MV 3/82 25,000
  35,000Unindexed gain
  55,000 45,000Less Indexation
  allowance162.6 - 79.44 1.047 x 35,000
  36,645 36,645
  79.44Chargeable gain before PPR exemption
  18,355 8,355

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PRINCIPAL PRIVATE RESIDENCE

• Amos (contd)Consider exemptionPeriod of
  ownership 31/3/82 to 28/2/03 251
  monthsResidence 31/3/82 to 1/5/98 193 months
  Plus last 36 months of ownership. Total 229
  months Chargeable gain (use rebasing)
  8,355Less PPR proportion 229 x
  8,355 7,622
  251 Chargeable gain (before
  taper) 733

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PRINCIPAL PRIVATE RESIDENCEDEEMED RESIDENCE

• Certain periods of absence from a property may be
  regarded as periods of residence
• Periods when working abroad
• Up to four years working elsewhere in the UK
• Up to three years for any other reason.
• Final three years
• PROVIDED there is a period of actual residence
  sometime before and after a period of deemed
  residence (does not apply to final three years)
• and
• No other property is claimed as a PPR during
  period of absence.

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PRINCIPAL PRIVATE RESIDENCE DEEMED RESIDENCE

• Requirement of residence after period of absence
  can be waived if job commitment prevents return
  to the property.
• It does not matter that the house was let during
  the period of absence
• Final 36 months of ownership are always regarded
  as a period of PPR
• (even when more than one house is owned).
• The part of the gain not covered by PPR exemption
  is subject to CGT.

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PRINCIPAL PRIVATE RESIDENCEEXAMPLEHouse bought
on 1 June 1978 for 100,000. Sold 1 February 2003
for 350,000 (Assume that the MV 31/3/82 is
substantially less than original cost)

• Calculation of gain
• Exempt Non-
• Date Status exempt
• Months Months
• 1 June 1978 House bought for Actual
• 100,000 - Glasgow residence
• Ignore prior
• to 5/4/82
• 1 May 1980 Left house to Working in
  UK
• work in London. Ignore period
• up to 5/4/82
• 4/82 to 8/89 (7y 5m)
• Max 4 years 48 Any other reason
• Max 3 years 36
• over 3 years 5

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PRINCIPAL PRIVATE RESIDENCEEXAMPLE 2

• Status Exempt Non-
• Exempt
• Sep. 1989 Returned to Glasgow Actual
• house. residence 8 1 May 1990
  Took job in USA. Working
• abroad 9 1 Feb 1991 Returned to
  Glasgow Actual
• house. residence 58 1 Dec 1995
  Bought a second house
• in Glasgow as his PPR
  New PPR 7y 2m Final 3 years
  36
• Period over 3 years 50 1 Feb
  2003 Original Glasgow
• house sold
• for 350,000. Total 195 55
  Period from 1 April 1982 to 1 Feb.2003 20 years
  10 months 250 months

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PRINCIPAL PRIVATE RESIDENCEEXAMPLE 2
CALCULATION OF GAIN

• Sales proceeds 350,000
• Acquisition cost 100,000
• Unindexed gain 250,000
• Indexation allowance 162.6-79.4 1.048 x
  100,000
• 79.4 104,800
• Gain before PPR exemption 145,200
• PPR exemption
• (195/ 250) x 145,200
  113,256
• Indexed gain 31,944
• Taper relief 4 1 years - non-business asset
• 85 chargeable 27,152

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PRINCIPAL PRIVATE RESIDENCE RESTRICTIONS ON THE
RELIEF - CASE LAW

• Varty v Lynes (1976) dwelling house and part of
  the garden were sold leaving the rest of the
  garden to be sold (for development) later.
• On the later sale, PPR exemption was NOT
  available since the garden was not part of the
  owners PPR the house having been sold
  previously.
• Batey v Wakefield (1981) taxpayer had built a
  bungalow in the grounds of his main dwelling for
  a caretaker (who occupied it rent-free). The
  bungalow was regarded as part of the PPR as it
  was within its grounds.
• BUT

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PRINCIPAL PRIVATE RESIDENCE RESTRICTIONS ON THE
RELIEF - CASE LAW

• Lewis v Rook (1992) a gardeners cottage 175m
  from the main house was held NOT to be part of
  the same residence. Honour v Norris (1992)
  several flats close together in different
  buildings in a single London square and used by
  members of one family for various domestic
  purposes were held NOT to constitute a single
  private residence.
• Green v CIR (1982) held that unoccupied wings
  of a mansion partly occupied by a taxpayer were
  NOT necessarily part of his residence.
• Makins v Elson (1977) held that a caravan
  connected to mains water and electricity is a
  qualifying dwelling for PPR.

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PRINCIPAL PRIVATE RESIDENCEMORE THAN ONE
RESIDENCE

• If a person has more than one residence (owned or
  rented)
• He may elect for one to be regarded as his main
  residence - by notice to HMIT within 2 years of
  commencing occupation of the second residence.
• Individual must actually reside in both
  residences
• Any period of ownership not so nominated is a
  chargeable period for that residence
• If there are two residences with the second being
  treated as a residence and a bona fide delay in
  moving in occurs, the election need not be made.

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PRINCIPAL PRIVATE RESIDENCEMORE THAN ONE
RESIDENCE -

• JOB RELATED ACCOMMODATION
• The One residence rule is relaxed where
  individuals live in job-related accommodation
• They are treated as occupying any second dwelling
  house which they own if they intend, in due
  course, to occupy the house as their only or main
  residence.
• It is not necessary to establish actual residence
• Also applies to self-employed persons required to
  live in job-related accommodation (e.g. tenants
  of public houses)

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PRINCIPAL PRIVATE RESIDENCE LETTING RELIEF

• Two situations of letting relief
• Both have the effect of extending the PPR
  exemption. The relief given is the lowest of
• a)The part of the gain attributed to let periods
  not covered by the other PPR exemptions
• (b) The part of the gain that is covered by the
  PPR exemptions
• (c) 40,000.
• FIRST SITUATION
• When a property is let to a tenant during a
  period of absence and which is not covered by PPR
  exemptions

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PRINCIPAL PRIVATE RESIDENCE FROM PREVIOUS
EXAMPLE

• Letting exemption let house during period
  living in London
• Status Exempt Non-
• Exempt
• 1.5.80 Left house to work
• in London Working in UK
• Ignore period up
• to 5/4/82
• to 4/82 to 8/89 (7y 5m)
• Max 4 years 48
• Any other reason
• Max 3 years 36
• 1.9.89 over 3 years 5
• Sep. 1989 Returned to Actual
• Glasgow house. residence
  8 1/5/90 Took job in USA. Working
• abroad 9

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PRINCIPAL PRIVATE RESIDENCEEXAMPLE

• Status Exempt Non-
• Exempt
• 1 Feb 1991 Returned to Glasgow Actual
• house. residence 58 1 Dec 1995
  Bought a second house
• in Glasgow as his PPR
  New PPR 7y 2m Final 3 years
  36
• Period over 3 years 50 1 Feb
  2003 Original Glasgow
• house sold
• for 350,000. Total 195 55
• Period from 1 April 1982 to 1 Feb.2003 20
  years 10 months 250 months Chargeable gain
  31,944 is related to full period of
  non-exemption of 55 months.
• Part of gain relating to let part of non-exempt
  period (5/55) x 31.944
• 2,904

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PRINCIPAL PRIVATE RESIDENCE Letting exemption

• Letting relief is lowest of
• (a) 2,904
• (b) 113,256
• (c) 40,000
• Gain before PPR exemption 145,200
• PPR exemption (113,256)
• 
  31,944
• Letting exemption (2,904)
• Chargeable gain (before taper relief)
  29,040

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PRINCIPAL PRIVATE RESIDENCELETTING RELIEF
-Second situation

• When part of a property that forms a PPR is let
  (provided it is not entirely separate
  self-contained accommodation).
• The general rule is that if part of the property
  is used for business purposes then that part of
  the asset will be subject to CGT.
• But if the business purpose is its letting as
  housing accommodation then letting relief is given

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PRINCIPAL PRIVATE RESIDENCELETTING RELIEF
-Second situation

• EXAMPLE
• House bought for 19,500, owned for 10 years (120
  months). For all but the first 2 years (24
  months) half the house was let to tenants.
• The house was sold for 153,000.
• Period covered by full PPR exemption- 60 months
• First two and last three years (always given)
• Period covered by 50 PPR exemption 60 months
• middle five years
• Sales proceeds 153,000
• Cost 19,500
• Unindexed gain 133,500
• Indexation allowance (say) 20,000
• Gain before PPR exemption 113,500

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PRINCIPAL PRIVATE RESIDENCE LETTING RELIEF
-Second form 3

• Gain before PPR exemption 113,500
• PPR exemption
• 113,500 x 60/120 56,750
• 113,500 x 60/120 x 50 28,375 85,125
• 28,375
• Letting relief, lowest of
• (a) 28,375
• (b) 85,125
• (c) 40,000 28,375
• Chargeable gain Nil

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PRINCIPAL PRIVATE RESIDENCEBUSINESS PURPOSES

• To the extent a PPR is used for business purposes
  it will not be an exempt gain.
• No reliefs are available for the part used for
  business purposes including the last 36 months.
• Assume the same facts as above but that instead
  of letting 50 of the property for the final
  eight years of ownership it was used for business
  purposes.
• Gain before PPR exemption 113,500 PPR
  exemption
• 113,500 x 24/120 22,700
• 113,500 x 96/120 x 50 45,400 68,100
• Chargeable gain 45,400