How to use the PPR Exemption to legitimately avoid property capital gains tax - by Amer Siddiq

This is a good strategy for growing a small ‘rolling’ tax-free property portfolio. The aim of John and Aleesha is to sell a property three years after they have lived in it and avoid any CGT liability.

John and Aleesha decide to start investing in property and buy their first home, a two-bedroom terraced house, in 1995 for £50,000. They live in the house and then after three years (in 1998) decide to move to a bigger three-bedroom house. The cost of the new house is £145,000.

Instead of selling the house they rent out the two-bedroom house.

Again they live in the house for three years and then move into a new four-bedroom house with their two young children. AT the time of buying the three bedroom house they sell the two-bedroom house for £125,000 and rent out the three-bedroom house.

They have made a £75,000 tax-free profit on the sale of the two-bedroom house. This is because due it being their main residence they are able to claim the ’36 month rule’ relief to wipe-out any CGT liability.

They continue to live in this property for three years and then buy a bigger five-bedroom house. Again at the same time of buying the new house they sell the three-bedroom house for £245,000 and rent out the previous residence i.e. the four-bedroom house.

The CGT liability on the three-bedroom house is also zero because they claim the ’36 month rule’ once again. This means that they have made £100,000 profit on this house.

Also, from the sale of two houses, John and Aleesha have made £175,000 in tax-free income in just nine years. This equates to almost £20,000 of tax-free income on a yearly basis.

John and Aleesha continue to buy and sell a property every three years using this simple strategy.

Comments on this strategy

• This is a well planned and simple tax saving strategy as each property has ‘genuinely’ been the main residence.
• Ideal for people who are looking to grow small ‘rolling’ property portfolios
• In reality John and Aleesha could even have sold after renting their previous property for four years and still avoided CGT. This is because they could claim other relief’s i.e. the Private Letting Relief’. See Pay Less Property Tax for more info.

Wallace starts to invest in property in 1995. He has his main residence and buys property A, a two-bedroom apartment off-plan at a cost of £65,000. Two years later he buys property B also off-plan for £85,00. Three years later in 2000 he buys his third property, property ‘C’, a three bedroom semi-detached property for £160,000.

In January 2005 he decides to sell his three investment properties and has the following gains:

Property A – Selling price £165,000 = £100,00 gain

Property B – Selling price £170,000 = £85,000 gain

Property C – Selling price £280,000 = £120,000 gain

This means that on his three investment properties he has a total gain of £305,000. Then he realises that he will be liable to pay CGT at 40% on a large part of his gain.

In order to minimise the CGT liability he considers moving into each of the properties for a ‘short’ i.e. 6 month period so that he can claim the generous tax breaks associated with PPR.

However although there is nothing to stop him from doing this, it is a very high-risk strategy. This is because if the Inland Revenue discovers that multiple properties have been nominated as the main residence prior to disposal then the sale will be challenged.

Wallace therefore decides not to take the risk of facing the wrath of the Inland Revenue, and therefore ends up selling his three properties and paying a tax bill in excess of £100,000!

Comments on this strategy

• Well the first fundamental mistake that Wallace made is that he never carried out any tax planning at all.
• He could quite easily have significantly reduced a £100,000+ CGT liability just by switching his residence to one of the properties, even if it was not possible to do it for all three.

Conan then buys his next property and this takes longer to develop. He buys it for £80,000 and again spends £20,000 developing it before selling it for £200,00 three years later.

This time his taxable profit is £100,000 and again there is no CGT liability which means he has made £100,000 tax free.

Conan continues to use this strategy for the next 10 years after which he has sold another three properties and made an extra £500.000 tax-free.

Comments on this strategy
Over a 15 year period Conan has bought and sold 5 properties, whilst living in them for a good length of time. Even if the Inland Revenue was to challenge him he is very likely to succeed, as he has just executed a very tax efficient saving strategy.

Duke considers a strategy where he will buy properties and look to renovate and sell them within six months whilst nominating this as his main residence. He produces his 10 year masterplan to his tax advisor in which he estimates £1,000,000 of tax free profits involving the sale of over 20 properties.

His strategy is soon filed into the waste-paper bin when his tax advisor points out that this is abusing the PPR rule and will fail when challenged by the Inland Revenue.

Comments on this strategy
Although there is nothing to stop Duke from implementing this strategy there is a very strong likelihood it will be challenged by the Inland Revenue and he will be classed as a ‘property trader’ and therefore will be liable to pay income tax on his profits.