Following the publication of the government’s policy summary paper on 29 July 2024 and as the UK prepares for its Autumn Budget on 30 October 2024, much of the speculation about how the Labour government might put its imprint on the reforms for non-UK domiciled individuals (“non-doms“) first proposed by the previous, Conservative, government in March this year has been broadly resolved, with attention now turning towards the prospect of a higher tax burden through increased rates of capital gains tax (“CGT“) and the restriction or abolition of tax reliefs.
While business owners and entrepreneurs may be focusing on how possible changes to capital gains tax (“CGT“) may impact an impending exit or the realisation of carry; for non-doms whose plans to leave the UK may have been accelerated, another important consideration is likely to be the CGT that might be payable on the sale of their UK home(s). Often, the sale will take place once the non-dom has already ceased to be tax resident in the UK.
Non-UK residents have been exposed to CGT on the disposal of UK residential property since 2015. However, where a property has been used as the individual’s main residence worldwide and the relevant conditions are met, Principal Private Residence (“PPR“) relief can exempt a proportion up to the entire gain from charge. It is therefore a very important relief, worth exploring in more detail.
Essentially, if the home that is being sold is located in a territory in which neither the individual owning the property, nor their spouse or civil partner (and we use the term spouse to include either) is resident, PPR relief will only be available if a day-count test is met. The day-count test is satisfied where either the individual or their spouse spends at least 90 days in one or more homes situated in the territory of the property being sold. Although in this article we focus on non-UK residents selling UK homes, these provisions also apply to UK residents selling non-UK homes.
Some key points to note are as follows.
- If the property being sold is in the UK, the owner’s residence is assessed on the basis of the UK’s Statutory Residence Test. If the property being sold is located outside the UK, then it will be necessary to consider the residence rules of the relevant territory.
- The tax residence test applies to the whole tax year of sale. Where a home is sold part way through a tax year, the day-count test is pro-rated and applied to the partial tax year.
- A day spent by the individual or their spouse at the relevant home is counted for the purposes of the day-count test; however, a day on which both the individual and their spouse are present is not counted twice.
- Where a beneficiary occupies a home under the terms of a trust, the trustees’ ability to claim PPR relief depends on the beneficiary satisfying either the same jurisdiction of residence requirement or the day-count test.
- Where an individual owns multiple homes, they can elect which one of them should be treated as their main residence for PPR purposes within two years from the date the combination of their worldwide residences changes. Non-UK residents can cancel or vary such an election in the CGT return submitted following the sale of a UK home.
Every situation will need to be assessed on its facts, but given the benefit PPR relief could provide (affording a complete exemption from CGT in appropriate circumstances), such assessment could be time well spent. Should the Autumn Budget result in the introduction of higher rates of CGT than the current 24% rate applicable on the disposal of property interests, the value of PPR relief may become even greater.