Private Residence Relief from Capital Gains Tax
Private Residence Relief from Capital Gains Tax
What is Private Residence Relief?
A gain arising on the disposal of a residential property may give rise to a Capital Gains Tax (CGT) liability. However, a valuable tax relief called Private Residence Relief (PRR) automatically applies on the sale of one’s main home, and this relief may exempt all or part of the gain which arises from CGT.
How Private Residence Relief works
The relief applies to the disposal of a 'dwelling house' which is, or has been, the only or main residence of an individual.A ‘dwelling house’ is not defined by legislation, but there is a body of case law that can provide guidance. In most cases, the whole building in which an individual lives will be the dwelling house, but in some cases, the dwelling house may include not just the main building, but also relevant adjoining buildings - for example, a garage or an outbuilding used as part of the household. Conversely, flats or self-contained units within a larger building can constitute dwelling houses in their own right.
Gardens and grounds which fall within a permitted area also qualify for the relief. The permitted area is defined in the legislation as half a hectare, which includes the area of the house occupied. However, a larger area may qualify, provided that the area is required for the 'reasonable enjoyment' of the property.
To qualify for relief, it is necessary to show that the property has been occupied as a “residence” which pre-supposes a degree of “permanence, continuity and the expectation of continuity”.
HMRC has not given any guidance about how long a taxpayer must live in a property for that to constitute actual occupation as their 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 returning to a property for a few weeks after prior occupation in the past may be treated as resuming occupation.
The important thing is that the taxpayer must satisfy HMRC that for that short period the property was their home. Case law has shown that HMRC will look at the quality of the occupation rather than the physical time period. The First-tier Tax Tribunal has ruled that to have quality of residence, the occupation of the house 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.
Some common complexities
If any part of the house is used exclusively for business purposes, the relevant proportion of any gain made on sale will not qualify for relief.If the property is not occupied as a residence throughout the period of 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 recently also confirmed that the period of ownership commences on completion date rather than date of exchange.
If you have more than one residence during any period, it becomes necessary to decide which is your main residence. You could do this by giving notice to HMRC within two years of the time you occupied an additional property as your residence, or the time you changed your combination of properties occupied as residences. This can be prompted not only by property purchases but also by marriage/civil partnership i.e. if each person owns a separate residence at that date. In the absence of such a notice the matter is decided on the facts of each case.
There are restrictions for non-UK tax residents on the ability to claim PRR linked to the Statutory Residence Test (SRT), albeit the aforementioned concessions relating to non-occupation may apply. See here for more details on the SRT and here for a summary of the tax implications for a non-UK resident owning UK property.
Spouses and civil partners can only have one primary residence between them. Further complexities may arise where a residence is transferred between spouses.