This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies. To find out more about cookies on this website and how to delete cookies, see our privacy notice.
Analytics

Tools which collect anonymous data to enable us to see how visitors use our site and how it performs. We use this to improve our products, services and user experience.

Marketing

A bit of data which remembers the affiliate who forwarded a user to our site and recognises orders from those who become customers through that affiliate.

Essential

Tools that enable essential services and functionality, including identity verification, service continuity and site security.

Enrol now on the free landlord tax strategies course


To enrol in the 7 tax saving strategies email course complete the form below. The first module will be emailed to you immediately.

Enrol now on the free landlord tax strategies course

Thank You!

Free Tax Saving Strategies Course
x
Save Thousands - For Free

Before you go, sign up to our free tax saving email course. Get 7 top property tax saving strategies in your email inbox that will help you save thousands in tax. Unsubscribe any time.

Email Course
The seven FREE property tax busting strategies course reveals the secrets of how to legitimately beat the taxman and boost your property profits!
View All Tax Articles View Tax Articles From:

How to use the PPR Exemption to legitimately avoid property capital gains tax - by Amer Siddiq


The purpose of this article is to explain some important aspects of the Private Residence Relief (PPR) and to discuss some common strategies that are used by investors to benefit from the relief.

How long before a property is classed as your Private Residence?

This is a very commonly asked question and the Inland Revenue has not given any specific guidance as to how long you need to live in a property before you can claim the relief.

However as a general rule of thumb, you should look to make it your permanent residence for at least 1 year i.e. 12 months (but it can be less and there have been successful cases for much less than this).

The longer you live in a property the better chance you have of claiming the relief.

The Inland Revenue is not necessarily interested in how long you lived in the property. They are more interested in whether the property really was your home! They want to know you really did live in the property!

 




How to show a property was or is your main residence


If you want to claim this relief then here are some pointers that will help you to convince the taxman that a property genuinely was your private residence.

a) Have utility bills in your own name at the property address.

b) Make the property address your voting address on the electoral register.

c) Be able to demonstrate that you bought furniture and furnishings for the property. Keep receipts and prove that bulky furniture was delivered to the property address under your name.

d) Have all bank statements delivered to the property address.

Frequently changing your PPR to grow a tax-free portfolio

Investing and maximising your PPR

A very popular strategy for helping to grow a tax-free portfolio is to have a property nominated as your main residence at some time prior to selling it.

However, it is important to understand that if you have a portfolio of properties and then decide to nominate each of your properties in turn, as your Private Residence, then the Inland Revenue could very well challenge you. In fact they are very likely to challenge you. They could challenge you on the basis that the reason for nominating your properties is to avoid paying tax.

Consider the following two case studies, which involve investors who let their properties.

Case Study

Growing a Rolling Tax Free Property Portfolio

This is a good strategy for growing a small ‘rolling’ tax-free property portfolio. The aim of John and Aleesha is to sell a property three years after they have lived in it and avoid any CGT liability.

John and Aleesha decide to start investing in property and buy their first home, a two-bedroom terraced house, in 1995 for £50,000. They live in the house and then after three years (in 1998) decide to move to a bigger three-bedroom house. The cost of the new house is £145,000.

Instead of selling the house they rent out the two-bedroom house.

Again they live in the house for three years and then move into a new four-bedroom house with their two young children. AT the time of buying the three bedroom house they sell the two-bedroom house for £125,000 and rent out the three-bedroom house.

They have made a £75,000 tax-free profit on the sale of the two-bedroom house. This is because due it being their main residence they are able to claim the ’36 month rule’ relief to wipe-out any CGT liability.

They continue to live in this property for three years and then buy a bigger five-bedroom house. Again at the same time of buying the new house they sell the three-bedroom house for £245,000 and rent out the previous residence i.e. the four-bedroom house.

The CGT liability on the three-bedroom house is also zero because they claim the ’36 month rule’ once again. This means that they have made £100,000 profit on this house.

Also, from the sale of two houses, John and Aleesha have made £175,000 in tax-free income in just nine years. This equates to almost £20,000 of tax-free income on a yearly basis.

John and Aleesha continue to buy and sell a property every three years using this simple strategy.

Comments on using PPR to grow a tax free property portfolio

  • This is a well planned and simple tax saving strategy as each property has ‘genuinely’ been the main residence.
  • Ideal for people who are looking to grow small ‘rolling’ property portfolios
  • In reality John and Aleesha could even have sold after renting their previous property for four years and still avoided CGT. This is because they could claim other relief’s i.e. the Private Letting Relief’. See Pay Less Property Tax for more info.

Now we will move onto the case study of Wallace. He has not done any tax planning and has just followed the normal buy-to-let route.

Case Study

Case Study - Not making use of Principle Private Residence 

Wallace starts to invest in property in 1995. He has his main residence and buys property A, a two-bedroom apartment off-plan at a cost of £65,000. Two years later he buys property B also off-plan for £85,00. Three years later in 2000 he buys his third property, property ‘C’, a three bedroom semi-detached property for £160,000.

In January 2005 he decides to sell his three investment properties and has the following gains:

Property A – Selling price £165,000 = £100,00 gain

Property B – Selling price £170,000 = £85,000 gain

Property C – Selling price £280,000 = £120,000 gain

This means that on his three investment properties he has a total gain of £305,000. Then he realises that he will be liable to pay CGT at 40% on a large part of his gain.

In order to minimise the CGT liability he considers moving into each of the properties for a ‘short’ i.e. 6 month period so that he can claim the generous tax breaks associated with PPR.

However although there is nothing to stop him from doing this, it is a very high-risk strategy. This is because if the Inland Revenue discovers that multiple properties have been nominated as the main residence prior to disposal then the sale will be challenged.

Wallace therefore decides not to take the risk of facing the wrath of the Inland Revenue, and therefore ends up selling his three properties and paying a tax bill in excess of £100,000!

Pitfalls of not planning use of Principle Private Residence Relief

  • Well the first fundamental mistake that Wallace made is that he never carried out any tax planning at all.
  • He could quite easily have significantly reduced a £100,000+ CGT liability just by switching his residence to one of the properties, even if it was not possible to do it for all three

Developing and maximising your PPR

Similar observations can also be made for property developers who decide to develop properties and re-sell them for a profit whilst living in them.

Timing and period of occupation is key here. This is because if you develop and re-sell quickly then the greater the chance there is that the Inland Revenue will challenge you.

Consider the following two case studies where Conan and Duke are both employed as property developers.

Case Study

Case study - living in property as you develop it to make use of PPR

Conan then buys his next property and this takes longer to develop. He buys it for £80,000 and again spends £20,000 developing it before selling it for £200,00 three years later.

This time his taxable profit is £100,000 and again there is no CGT liability which means he has made £100,000 tax free.

Conan continues to use this strategy for the next 10 years after which he has sold another three properties and made an extra £500.000 tax-free.

Benefits of living in property you are developing

Over a 15 year period Conan has bought and sold 5 properties, whilst living in them for a good length of time. Even if the Inland Revenue was to challenge him he is very likely to succeed, as he has just executed a very tax efficient saving strategy.

Now lets look at the situation for Duke.

Case Study

Case study - Abuse of the PPR Rule when developing property

Duke considers a strategy where he will buy properties and look to renovate and sell them within six months whilst nominating this as his main residence. He produces his 10 year masterplan to his tax advisor in which he estimates £1,000,000 of tax free profits involving the sale of over 20 properties.

His strategy is soon filed into the waste-paper bin when his tax advisor points out that this is abusing the PPR rule and will fail when challenged by the Inland Revenue.

Comments on this strategy

Although there is nothing to stop Duke from implementing this strategy there is a very strong likelihood it will be challenged by the Inland Revenue and he will be classed as a ‘property trader’ and therefore will be liable to pay income tax on his profits.