kpmg
KPMG’s Tax Business School®
Capital Gains Tax Case Study
Part A - Points of discussion
Disposal of house in Edinburgh
Edward will be liable to CGT on the disposal of the house but he may be able to claim relief
under the principal private residence exemption and also under the letting relief provisions.
Principal Private Residence Exemption
The house has been Edward’s only or main residence at some point during his period of
ownership, so it must be considered whether relief should be due under the PPR provisions.
The PPR exemption is given only for a period during which a dwelling house was the only or
main residence of the individual concerned and for certain other periods of deemed occupation.
However, in determining these periods of residence, any period before 31 March 1982 is
ignored (s.223(7) TCGA 1992). Therefore Edward cannot obtain relief for the period October
1976 - February 1982.
Since Edward’s actual residence as his PPR was pre-March 1982, is the effect of s.223(7)
TCGA 1992 therefore to deny Edward any PPR relief at all? No! To determine whether or not
a property qualifies for any relief at all (i.e. has it been a person’s only or main residence during
the period of ownership), the whole period of ownership, including any period before 31/03/82
is considered. The effect in this instance is therefore not to give relief for any period of
Edward’s residence pre-31/03/82 but relief can still be given for the final 36 months of his
ownership (s223(1) TCGA 1992 and ICAEW TR 739).
Allowable expenditure
Edward’s allowable expenditure comprises the cost of acquisition (probate value), enhancement
costs (double garage extension) and the incidental costs of enhancement (council planning
costs), and the costs of disposal. These are capital expenses. There are no incidental costs of
acquisition because Edward inherited the property. (s.38 TCGA 1992)
The repainting costs are revenue in nature and not allowable in calculating the capital gains
arising on the disposal of the house.
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Andy Lymer 2002\ Capital gains tax\cgtCSAa-02/08/01
kpmg
KPMG’s Tax Business School®
Capital Gains Tax Case Study
Part A - Points of discussion
Gain arising is therefore calculated as:
Proceeds
Less: Costs of disposal
Cost
Market Value
£
£
280,000
280,000
(8,000)
(8,000)
272,000
272,000
Less: Qualifying expenditure
Cost or
(60,000)
(100,000)
31/3/82 value
Enhancement costs
Incidental costs of enhancement
Unindexed gain
(15,000)
(15,000)
(1,000)
(1,000)
196,000
156,000
(104,700)
(104,700)
(7,605)
(7,605)
(507)
(507)
£83,188
£43,188
Less: Indexation allowance to 4/98:
100,000* x 162.6 - 79.44 (= 1.047)
79.44
15,000 x 162.6 - 107.9 (= 0.507)
107.9
1,000 x 162.6 - 107.9 (= 0.507)
107.9
Chargeable gain before reliefs
Lower gain taken
£43,188
* Note that in both computations indexation is automatically taken on the higher of cost and
market value at March 1982.
2
Andy Lymer 2002\ Capital gains tax\cgtCSAa-02/08/01
kpmg
KPMG’s Tax Business School®
Capital Gains Tax Case Study
Part A - Points of discussion
Calculation of chargeable gain
£
Gain before reliefs
43,188
Less: PPR relief (s.223(1) TCGA 1992)
£43,188 x 36 months *
240 months
(6,478)
36,710
Less: Letting relief (s.223(4) TCGA 1992)
Lowest of:
a) gain exempt under s.223(1) - £6,478
(6,478)
b) £40,000
c) chargeable gain before relief - £36,710
______
Chargeable gain before taper
£30,232
The gain would be tapered at the rate due for non-business assets - the qualifying holding period
is 6 April 1998 - 30 March 2002 = 3 complete tax years plus a bonus year (held pre-17 March
1998) = 4 years = taper to 90%. [If Edward had sold the house 6 days later, the gain would be
tapered to 85% as that would then amount to 4 complete tax years plus the bonus year.]
However, note that as Edward has losses brought forward from the previous year, the benefit of
taper relief may be lost.
* The last 36 months are included in the numerator even if the residence was not the only or
main residence during this time.
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Andy Lymer 2002\ Capital gains tax\cgtCSAa-02/08/01