My 24 April 2014 blog reported that buried within the Government’s March 2014 consultation on extending Capital Gains Tax (CGT) to non UK residents was a change to CGT Principal Residence Relief (PRR) affecting UK residents.
Last week, the Government published its response to the consultation and confirmed that PRR is set to change. The changes are not as envisaged in the consultation document though.
This is probably a good thing as it looked as though the ability to make an election, to determine which of two or more residences got the benefit of PRR, was going to be stopped for both UK and non UK residents. No such talk in the response document, which suggests that the ability to elect is to remain.
Instead, for UK residents, the PRR story now shifts to ownership of foreign residences. PRR will still only be available on one property, if an individual owns a property in the UK and a property abroad. However, under the proposed new system, an individual’s main residence will only be eligible for a PRR claim to relieve gains accrued in any given tax year if either 1) for that tax year, the individual making the disposal is tax resident in the same country as the property is located or 2) the individual spent at least 90 midnights in that property (or in multiple properties in the same country) in that tax year. So if UK residents want a non UK property to get the benefit of PRR, they will have to spend enough time there each tax year – we are moving towards a system of claiming PRR on a tax year by tax year basis, at least in respect of these new rules.
For the purposes of the 90 day rule, for married couples and civil partners, occupation of a residence by one spouse or partner will be regarded as occupation by the other. This is in line with the current rules that married couples are still regarded as living together for the purposes of CGT, even if they do not always reside in the same house, and living together spouses/partners can only have one main residence between them for the purposes of PRR.
Any previous election to make a foreign property the main residence for PRR purposes by a UK resident will fall away.
UK and non UK trustees will be interested in this change also, if they hope to be able to claim PRR on the disposal of a trust property in due course, due to its occupation by a beneficiary of the trust. That beneficiary will have to satisfy the above test.
Non UK residents will find it difficult to meet the requirement for being present in a UK residence for 90 days without risking becoming UK resident at some point, in accordance with the statutory residence test.
Nothing is for sure until the draft legislation is seen (due for publication later on this month), which itself could be altered before arriving on the statute book, after the 2015 general election. However, the Government’s intention is clear, even if the details aren’t.