Principal Private Residence Relief from Capital Gains Tax

Private Residence Relief from Capital Gains Tax: how it works

Ben Handley is a BDO Tax Partner with over 20 years of experience advising private clients on transactions, life events and planning for the future against a backdrop of continual law change and increased complexity.
 

What is Private Residence Relief?

If you dispose of a residential property and make a gain, you may have a Capital Gains Tax (CGT) liability. However, a valuable tax relief called Private Residence Relief (PRR) automatically applies on the sale of your main home, and this relief exempts all or part of the gain from CGT. This means that if the whole gain is exempt, then no CGT will be due.

If your property is sold at a loss, then PRR restricts the allowable loss on the same basis, so a loss would not be allowable if the property qualifies for PRR. In these cases, if you have more than one residence, a valid main residence nomination can have a significant impact on the availability of PRR. In such circumstances professional advice should be sought.
 

How does a property qualify for PRR?

PRR applies when you dispose of a 'dwelling house' which is, or has been, your only or 'principal' residence. The value of the property does not affect the amount of relief that you can claim.

A 'dwelling house' is not defined in law, but in most cases, the whole building in which an individual lives will be the 'dwelling house'. In some cases, the 'dwelling house' might include relevant adjoining buildings like a garage or an outbuilding used as part of the household. Flats or self-contained units within a larger building constitute 'dwelling houses' in their own right.

Gardens and grounds that fall within half a hectare also qualify for the relief – but this half hectare includes the area occupied by the buildings. However, a larger area can qualify, if you can prove that the area is required for the 'reasonable enjoyment' of the property.

To qualify for relief, you need to show that the property has been occupied as a "residence", which means that you need to prove a degree of "permanence, continuity and the expectation of continuity".

HMRC has not given any guidance about how long you must live in a property for it to constitute actual occupation as your only or main residence. Instead, it will look at the individual facts and circumstances of each case. For example, a few weeks of occupation after purchase may not qualify, but if you return to a property for a few weeks after having lived there in the past may be treated as resuming occupation.

The important thing is that you must satisfy HMRC that the property was your home - HMRC will look at the quality of the occupation rather than the time period. The First-tier Tax Tribunal ruled that the occupation of the property should constitute not only sleeping, but also periods of 'living' – i.e. cooking, eating a meal sitting down and generally spending periods of leisure time at the house. Having contemporaneous evidence is helpful in case you are challenged by HMRC.
 

How to calculate PRR

Broadly, the capital gain that is eligible for relief is calculated as follows:

Total gain made on sale 

   x

Periods of occupation

___________________

Total Period of ownership


Certain activities and conditions can complicate the application of PRR. The most common ones are listed below.
 

Using your home as a business

If any part of your house is used exclusively for business purposes, the relevant proportion of any gain made on sale will not qualify for relief.
 

Making renovations

The law aims to confine PRR to the occupation of a dwelling-house as a place of residence, and therefore challenges cases where the acquisition, or later expenditure on the property, was “wholly or partly” for the purpose of realising a gain. In certain circumstances relief may be restricted or denied where the acquisition or expenditure falls within specific anti-avoidance provisions.

The tax treatment where a property is demolished and rebuilt is complex and depends on the particular facts and circumstances.
 

Periods of absence

If you do not occupy the property as a residence throughout ownership, relief can be restricted to actual periods of occupation. There are specific concessions for periods of non-occupation to qualify for relief where relevant conditions are met. The Court of Appeal has also confirmed that the period of ownership commences on the completion date, rather than on the date of exchange.

The following periods of absence are treated as periods of actual occupation when calculating the gain eligible for relief:

  1. Any periods of absence for whatever reason not exceeding three years in total
  2. Any period of absence when employed outside the UK
  3. Any periods not exceeding four years in total due to certain employment requirements
  4. Being the spouse of and living with someone who meets condition iii. above.


For these periods of absence to qualify, there must be a time both before and after the absence when the dwelling house is the individual's only or main residence. However, for conditions ii, iii & iv, absences due to employment will qualify even if the individual does not return to the dwelling house afterwards if the reason for not returning is that their employment requires them to live elsewhere.

If a new home is not occupied after it has been acquired e.g. because essential refurbishment, redecoration or alterations are required, the first 24 months can be treated as if the house had been the only or main residence in that period.

More than one residence

If you have more than one residence during any period, you need to decide which is your main residence. You should do this by giving notice to HMRC within two years of the time you occupied an additional property as a residence, or the time you changed your combination of properties occupied as residences.

This also includes purchase of non-UK homes, a rented home and properties acquired by marriage or civil partnership.

Having an election in place is extremely valuable, because otherwise it will be determined 'on the facts', which may mean that the relief attaches to a property that you are not selling, or is standing at a lower gain or even a loss.

Living abroad

There are restrictions for non-UK tax residents on the ability to claim PRR linked to the Statutory Residence Test (SRT), however the concessions relating to non-occupation may apply.

As a result of the introduction of CGT for non-residents on the disposal of residential property, the PRR rules were amended from 6 April 2015. The changes affected UK-resident individuals as well as overseas residents.

For tax years from 6 April 2015 onwards a property may only be treated as an individual’s main residence for a tax year where the person or spouse has either been tax resident in the same country as the property, or stayed overnight in the property at least 90 times in that tax year. The rules apply to UK-resident individuals disposing of an overseas residence just as they do to non-UK residents disposing of a UK residence.

Any night spent by the individual’s spouse or civil partner in the property may be counted as a night spent by the individual in that property, although a night cannot be counted twice. If an individual has two or more residences in the same country, the number of overnight stays at those properties can be aggregated for the purpose of the 90-day test.

When reviewing the availability of PRR and deciding on the number of nights to stay in a particular property, you should consider the possible impact this may have on your tax residence status under the SRT.

PRR for Couples

Spouses and civil partners can only have one primary residence between them Married couples and civil partners can only have one main residence between them.

If at the date of marriage, the couple each own a residence and continue to use both properties as residences, they can jointly nominate which of the properties is to be treated as their qualifying residence for PRR purposes. The two-year period for making the nomination commences on the date of marriage. The effect of marriage means that one property ceases to qualify for PRR and becomes exposed to CGT. The final nine months of ownership of the now exposed property will be eligible for PRR (see below).

If spouses are living together for any part of a tax year, transfers of chargeable assets in that year are automatically treated as made on a no gain, no loss basis for CGT purposes.

There are specific provisions that mean that the transferee spouse inherits the historical CGT base cost and the occupation history for PRR of the transferor spouse for the purposes of calculating a gain on a future disposal. There may be stamp duty land tax (SDLT) implications if there is a mortgage on the property above the 0% threshold, and consent of the lender would also be required.

Read more about CGT on separation and divorce here.


Final period exemption

Provided a property has been the only or main residence at some point during the period of ownership, the final nine months of ownership will qualify for relief, regardless of how the property is used during that time. This period is extended to 36 months in certain circumstances, for example, when a person is a long-term resident in a care home.

Example calculation with some of the qualifying periods

P bought a house on 1 April 2008 and sold it 13 years later on 31 March 2021.

P occupied it as his main residence for 10 years from 1 April 2008 to 31 March 2018.

It was then let as residential accommodation for three years from 1 April 2018 to 31 March 2021 until it was sold at a gain of £1,000,000.

Calculation


Net gain after sale



£1,000,000

Less PPR relief

10 years + final 9 months x £1,000,000

         13 years

£826,923

Chargeable gain


£173,077


No lettings relief is available, as the landlord is letting his entire home, and there is no shared occupancy. PRR is also given for the final nine months of ownership.

Lettings relief

Lettings relief is available when all or part of a residence has been let as residential accommodation, and (since 6 April 2020) if the owner is in shared occupancy with the tenant. For all disposals after 5 April 2020 where the owner was not in shared occupancy with the tenant, periods that would have qualified before that date will no longer be eligible for lettings relief. This may result in an unexpected CGT charge for home sellers who had let their whole property to tenants a long time ago, when lettings relief would have been available.

Reporting requirements

For UK tax residents, if a gain is not fully covered by PRR and there is CGT due, then you must submit a UK property return to HMRC within 60 days of completion and the CGT paid at the same time. This applies even if you would normally complete an annual self-assessment tax return. For non-UK residents, a return is due regardless of whether there is any tax liability.

How we can help

The tax implications of selling your residential property can be complicated, and you should make sure to get specialist advice before making any decisions. Our specialist private client tax team has decades of experience in handling complex CGT and PRR cases. We can advise on all aspects of obtaining this valuable CGT relief, from analysing whether the relief is available for you, to measuring the extent of the relief, and completing all the required processes to report the disposal and obtain the relief.

Speak to the team

Key Contacts

Ben Handley

Ben Handley

Partner, London Tax Group, Private Client Services
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