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Tax relief for landlords

Principal Residence Relief

Landlords that may have lived in their buy-to-let property prior to selling may have a pleasant surprise according to property tax expert Steve Sims. This is because they could benifit from what tax professionals known as Principal Residence Relief or PRR. Steve who has written the guide Paying Less Property Tax for dummies has set out for Property Hawk users 12 points that tax officials use for checking out wether a landlords investment property qualifies for this very generous capital gains tax relief on the sale of their investment property.

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The PRR 12-point check list

HMRC publish guidance manuals for tax inspectors. The aim of these manuals is to help tax inspectors apply rules consistently and to give them the latest information to aid their decision-making.

These manuals cover a whole range of tax matters and procedures, including dealing with CGT that includes a step-by-step guide to the points to prove for applying PRR to property disposals.

Big deal! What’s the point of knowing that?

Well, if you want to save every penny you can in tax, it makes sense to understand how the taxman approaches a case. Then, you can structure your financial affairs to cover all the bases he or she may consider, lessening the chances of falling victim to what could turn out as a lengthy and costly tax investigation.

PRR 12-step checklist

Here are the points to prove a tax inspector ticks off on a checklist before allowing a PRR claim from a taxpayer:

1. Is the property a home?

Confirm the property is a residential property capable of use as a home

2. Has the taxpayer really lived there?

HMRC keeps a ‘subfile’ on all taxpayers’ main records linked to official databases like the electoral roll, bank and employment information, and the Land Registry. If someone claims a property was their main home to obtain PRR on disposal, the tax inspector will cross-reference these files to check the claim.

3. Did the taxpayer live in all or part of the property?

If only part of a property was a main home, then PRR only applies pro rata to that part of the building. Any business use must be established and the PRR apportioned accordingly.

4. How long was the property the taxpayer’s main home?

This means determining the period of ownership and whether the taxpayer lived in the property for all or part of the period.

5. How large are the house, gardens and grounds?

The tax inspector needs to determine the extent of a home for PRR.

6. Does the whole property qualify for PRR?

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The ‘permitted area’ that qualifies for PRR is 0.5 hectares. If the gardens or grounds are more extensive, PRR may not apply to the gain in value of land and buildings outside the permitted area.

7. Who owns the property?

The tax inspector will check to see who owns the property and whether all the owners qualify for PRR.

8. Check for any property swaps

Joint owners of more than one property may exchange their shares of ownership so each ends up owning the property they live in.

9. Was the property really a home or a letting property or development project?

If a taxpayer tries to evade CGT on the sale of a letting property where they have never lived or is claiming a development project was a main home, PRR does not apply.

10. Have the owners separated or divorced?

Different PRR rules apply to married couples living together than if they are separated and live apart.

11. Is any settled property involved in the PRR claim?

Settled property is property held in a trust. PRR rules may apply to settled property.

12. Do ‘dependent relative’ rules apply?

If a dependent relative lives in a property you own as their main home without paying rent or rent in kind, and they moved in before April 6, 1988, PRR might apply to the disposal. Is the PRR claim correctly calculated?

Finally, once the tax inspector is satisfied all the above criteria are ticked off the list; he or she will calculate PRR due and crosscheck the figures with the taxpayer’s claim.

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