Tax Changes to Private Residence Relief

private residence relief

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Find out about HMRC’s changes to Private Residence Relief.

What’s changing?

Until 5th April 2020, where a home was transferred between spouses, the recipient inherited the spouse’s ownership history, but only as long as the property was the transferring spouse’s only or main residence at the time of transfer. This would mean that no gain would be realised on the sale, and so it would be treated as a nil gain, nil loss transfer.

The requirement for the property to be the main residence at the time of transfer was removed from 6th April 2020, which may sound like it will improve the couple’s tax position, however, it is not a simple as it might first seem.

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The Good

Sally lives in a house for 10 years as her main residence. She then moves out to live with her husband, John. When she moves in with him, she gives him 50% of her former home.

When Sally and John sell the house, John will be entitled to a substantial exemption, even though he has never lived there, as he has inherited it from Sally, potentially saving him thousands of pounds.

The Bad

Diane has owned a house for ten years, but hasn’t lived in it. She moves into it with her partner, George, and they live in it as their main residence. Diane transfers 50% of the house to George.

Under the old rules, when they sell this house, George would have a clean slate and could have benefitted from an ‘untarnished’ Private Residence Relief (PRR). However, under the new rules, he inherits his wife’s 10 years of ownership without it being the main residence, and such the relief won’t apply for that period, meaning George could be paying thousands more because of the rule change.

The Ugly

This change has stopped a previously available planning opportunity.

Before 6th April 2020, a house with a ‘bad’ PRR history could be transferred from one spouse to another before the couple moved in to the property. This effectively meant that the PRR was reset for the spouse receiving it, and they could develop a ‘good’ PRR history before selling it.

Now, however, the spouse receiving it also inherits the ‘bad’ PRR history, and the removal of the main residence requirement has removed most of the ability to plan in this area, as the recipient spouse is in the same situation as the spouse transferring it in all cases.

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