Most people are aware that gains on the sale of a main residence are not generally subject to capital gains tax, due to a relief commonly known as Principal Private Residence (PPR) Relief. They are generally more fuzzy about the application of the relief to a loss and I have heard at least one professional adviser argue that the exemption only applies to gains and not losses (and therefore the sale of a PPR can give rise to an allowable loss).
Although it is true that the main PPR legislation only explains how gains are relieved, it is clear from section 16(2) of TCGA 1992 that similar ‘reliefs’ should be applied to losses:
16(2) Except as otherwise expressly provided, all the provisions of this Act which distinguish gains which are chargeable gains from those which are not, or which make part of a gain a chargeable gain, and part not, shall apply also to distinguish losses which are allowable losses from those which are not, and to make part of a loss an allowable loss, and part not; and references in this Act to an allowable loss shall be construed accordingly.
Therefore, it is clear that losses of a PPR will usually not be allowable losses, but is there anything that can be done to limit the exemption in such circumstances? To state the obvious, it will be to the taxpayer’s advantage to limit the exemption when there are losses.
Losses and lettings relief
Helpfully, HMRC’s view is that a corresponding reduction to a loss does not arise in respect of ‘letting relief’. The rationale for this is that letting relief “restricts the chargeable gain by three limits, explained at CG64710. If no gain arises, the limits cannot be applied. So the limits cannot be used to restrict a loss”. Therefore the PPR exemption for losses can usefully be restricted in cases where there has been any letting activity. Of course, this particular relief is now only available in very limited circumstances, where the house is occupied by both the owner and the tenant.
Nine month rule
PPR relief only applies automatically for the last nine months of ownership. This means that a proportion of losses will be allowable from nine months after the taxpayer has left the property. The precise rate at which these accrue will depend upon the overall length of ownership of the property.
Sell to a developer
When developers buy property they will often plan to demolish it and then rebuild. They will usually therefore be keen (for stamp duty land tax purposes) to ensure that the property has been demolished by the time of completion. This should suit a loss-making vendor.
When the property stands at a gain, the vendor will want the residence to be in existence at the capital gains tax disposal point (as this is a condition for the relief to apply). However, the opposite applies in a loss making scenario. This can be achieved by having a conditional contract which places an obligation on the vendor to demolish the property before the contract becomes binding. In such a case, all losses should be available to carry forward.
When there is any prospect of triggering a loss on the disposal of a PPR, advice should always be taken to see if there is any viable way of limiting the impact of PPR relief. At the very least, the position should be thoroughly looked into after the event, to ensure that losses are claimed where possible.
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