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Owners who wish to dispose of a property and avoid paying capital gains tax on the profits will find the exemption offered by principal private residence relief (PPR) most attractive; but what about profits made from the sale of a property occupied by a dependent relative?

In this blog, we’ll examine PPR a little more closely, and look at the conditions which must be met if an individual is hoping to claim PPR for dependent relatives.

What is PPR?

Principal private residence relief can be used to offset capital gains tax when gains are made on the disposal of a property. Ordinarily, in order to qualify, the property in question needs to have been the individual’s main residence; if this is the case, the individual will not have to pay capital gains tax for the years they lived in the home as well as the last eighteen months of ownership (whether they lived there or not). Note that the 2018 Autumn Budget proposed a potential change to this relief, which would shorten the automatic period from eighteen to nine months in 2020 (the government intends to consult on this).

PPR may also apply if the home has been occupied under the terms of a settlement, as well as against any gains from the sale of a property that has been occupied by a dependent relative.

However, in order to qualify for PPR for dependent relatives, strict criteria must be met.

PPR for Dependent Relatives

In order to take advantage of PPR for dependent relatives, the property must have been occupied by the relative from before 6th April 1988. The relative must have occupied the property on a rent-free basis (without any other consideration).

According to the Taxation of Chargeable Gains Act (s 226[6]), a dependent relative is:

• Any relative of the individual or the individual’s husband/wife who is incapacitated by infirmity (suffering from mental illness, physical disability, or chronic illness) or old age, and as such is not able to support themselves by working; or
• The individual’s mother – or the mother of the individual’s husband/wife – who is widowed, living apart from her husband, or a single woman following dissolution/annulment of marriage (whether she is incapacitated or not).

Note: there is no legal definition of ‘old age’. As such, it is commonly held to mean aged 65 or over (or, alternatively, between 55 and 65 years of age but without employment and – due to age – unable to work again in their chosen industry). In terms of a lower limit, in order to qualify as a dependent relative the individual must be over the school-leaving age.

In addition to the above, the following conditions must be met:

• The dependent relative must occupy the premises on a rent-free basis.
• The dwelling house must be the dependent relative’s sole residence.
• Couples who are co-habiting – a husband and wife, or civil partners, for instance – have to share the relief between them, and can only claim PPR for the disposal of one dependent’s residence. In addition, only one dependent’s residence can qualify at any one time.
• However, the dependent relative does not have to be the only person in residence in order for the property to qualify for PPR relief (e.g. if an individual’s mother is classed as a dependent relative but their father is not, the fact that the mother occupies the dwelling house should be enough to trigger the relief). 
• As mentioned above, the residence must have been obtained prior to 6th April 1988, and all the conditions above must have been met before that date.

This blog is the second edition in a series focusing on private principal residence relief. Visit the first part, ‘Capital Gains Tax and PPR’, if you haven’t already, and follow us on FacebookTwitter or LinkedIn to keep up to date with future publications.

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