Principal private residence relief (PPR) is a valuable relief from capital gains tax on the disposal of an individual’s only or main residence. Changes have been introduced which reduce the amount of relief available.
Up until 6 April 2020, provided the dwelling-house qualified for PPR at some point during the individual’s period of ownership, the last 18 months of ownership always qualified for the relief, even if it was no longer the individual’s only or main residence. From 6 April 2020, this relief has been reduced to nine months. The only exception to this will be if the owner has had to move out of the property in to a long-term residential care facility, in which case a 36-month exemption will apply. A new 30-day reporting and payment on account to HMRC also came into effect on 6 April 2020.
Expecting couples to agree terms of settlement and complete on a house sale within nine months of their separation was a tall order before COVID-19. With the government halting the housing market following the issuing of its guidance on buying and selling homes during the stay at-home period on 27 March, this may now be impossible to achieve within a nine-month period and result in capital gains becoming payable. Not only will an individual face capital gains tax after nine months of being out of occupation of the property, but they may also find they are in financial difficulties and their rehousing fund substantially depleted by having to make a payment to HMRC within 30 days.
Is it now time for the government to re-think these tax changes and extend its financial support to separating couples?
Different tax rules apply depending on whether a couple are married, separated or divorced. Tax advantages that may apply to a married couple are withdrawn at different stages of the divorce process. For tax purposes, a couple are treated as ceasing to be a married couple from the point of separation, rather than the start of the divorce proceedings. Under legislation, separation is defined as the point at which the couple are separated under a court order or in circumstances in which the separation is likely to be permanent.
Individuals who are married can transfer assets between themselves without any CGT arising. The transfer takes place on a no gain/no loss basis. After separation, a couple are connected parties for CGT purposes until the date of decree absolute. This is relevant, as transfers of assets between connected parties are deemed to take place at market value, regardless of the actual proceeds paid (if any). A chargeable disposal will arise and CGT will be due (subject to any annual exemptions, reliefs and losses available). The only exception to this rule is that any transfers that arise in the tax year of permanent separation of the married couple are treated as no gain/no loss. For example, if Mr and Mrs Shoosmiths separate on 5 May they will have until 5 April the following year to transfer assets without a CGT charge arising. If Mr and Mrs Shoosmiths separate on 1 April, they only have five days to take advantage of the no gain/no loss CGT treatment.
A special extension to PPR may apply where the spouse who moves out of the matrimonial home transfers their interest in that home to the other spouse under a court order or other agreement made in contemplation of a permanent separation. In this situation, provided the transferee has continued to occupy the property as their residence throughout the period since the transferor left the property, PPR relief will be extended from the date the transferor moved out of the property up until the date of the transfer. There is no maximum time that can be covered by this relief. However, the transferor will not be able to claim PPR on any other property during the extended relief period.
The clock starts ticking from the date of your separation and with one month of the current tax year already now behind us, it is essential that you take advice early on to maximize any tax reliefs available.