No PPR relief for traders!

The issue

Principal Private Residence (PPR) relief generally allows taxpayers to keep gains arising on the disposal of a property which has been used as that person’s only or main residence out of the capital gains tax regime.

For the vast majority of homeowners, this exemption means that there is no capital gains tax payable and no requirement to file a tax return just because of their house disposal. However, the rules become more complex where individuals own more than one property and there are several exemptions and elections which can apply (each deserving of their own tax bite!).

Some fairly common ‘pub tax advice’ is that individuals can avoid tax on properties that they develop by ensuring that they live in them. The purpose of this tax bite is to dispel that myth.

How does PPR relief apply to individual property developers?

It is not uncommon for individuals to acquire property, renovate it and then subsequently sell it within a short timeframe. However, there will be a big difference in the tax treatment on sale depending on the facts surrounding the acquisition.

PPR relief is only available in respect of capital transactions and is therefore not applicable to trading transactions which are subject to income tax. HMRC views this as a trading activity which will be subject to income tax.

Although possibly not needed there is also legislation within the PPR relief rules (224(3) TCGA 1992) which states that PPR relief will not apply ‘in relation to a gain if the acquisition of, or of the interest in, the dwelling-house or the part of a dwelling-house was made wholly or partly for the purpose of realising a gain from the disposal of it, and shall not apply in relation to a gain so far as attributable to any expenditure which was incurred after the beginning of the period of ownership and was incurred wholly or partly for the purpose of realising a gain from the disposal’. This clause is perhaps anticipating a scenario which is not quite trading but where there is still a significant profit motive (although in practice we have not seen it applied).

HMRC will consider a range of factors when raising an enquiry into a PPR claim, including:

  • The type of property;
  • The length of the period of ownership;
  • The frequency or number of similar transactions by the same person;
  • Supplementary work completed on the property;
  • The circumstances that were responsible for the sale;
  • Is the tax payer involved in the property development trade? and;
  • The motive.

Consequently, where individuals claim PPR in respect of a property which they only lived in for a short space of time, they should ensure they have sufficient evidence of the circumstances that made them want to sell, as HMRC would be likely to request this. Also, if the taxpayer has a track record of serially buying and selling houses (and claiming PPR relief) then the enquiry could go back many years (sometimes up to 20).

Forbes Dawson view

Ultimately, the PPR position will depend on the facts of the case, but for many misinformed taxpayers a HMRC enquiry could put them in an uncomfortable position. Anecdotally, HMRC have been paying much closer attention to PPR claims and there is a steady stream of cases going through the courts. For borderline cases taxpayers should clearly document the basis of their PPR relief and seek professional advice where appropriate. If the PPR relief does not actually apply then there would be a capital gain and various penalties and interest would be likely to attach to any liability unearthed by HMRC.




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