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.

Reporting requirements

Where a gain is not fully covered by PRR and there is CGT due, then a Land Return must be submitted to HMRC within 60 days of completion and the CGT due paid at the same time. This applies even if you would normally complete an annual self-assessment tax return.

How we can help

The tax implications of selling your residential property can be complicated, and specialist advice should be taken. We can advise on all aspects of obtaining this valuable CGT relief. From analysing whether the relief is available, to measuring the extent of the relief, to finally completing all the required administrative processes to report the disposal and obtain the relief. 

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

If at the date of marriage, the two parties each own a residence and the couple thereafter 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 is, therefore, 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).

Where 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. The effect of this provision is that the transferee spouse inherits the historical CGT base cost of the transferor spouse for the purposes of calculating a gain on a future disposal.

On separation, the transferor spouse can claim continuing PRR for the period from the date of ceasing to occupy the property up to the date of transfer if the property continues to be the transferee spouse’s main residence, provided that the transferor spouse has not elected for another property to be their main residence for any part of that period. For disposals on or after 6 April 2023, this provision will also apply where the property is disposed of to a third party if the transferee spouse has continued to occupy the property as their main residence and the transferor spouse has not elected for another property to be their main residence.

For disposals prior to 5 April 2023, where a couple have separated, after the year of permanent separation any transfer of assets is subject to CGT, with the deemed disposal proceeds being the market value of the asset. This tended to mean that by the time of a divorce or a dissolution of a civil partnership, CGT liabilities often arose when assets were transferred as part of the financial settlement.

However, for disposals on or after 6 April 2023, a much more favourable tax treatment applies and the separating spouses or civil partners will be given:

  1. Up to 3 years, after the year of separation, to make no gain/no loss transfer of assets.
  2. Unlimited time to transfer assets that are the subject of a formal divorce agreement.
  3. A spouse or civil partner who retains an interest in the former matrimonial home will have the option to claim PRR when it is sold.
  4. Individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner, and are entitled to receive a percentage of the proceeds when that home is eventually sold, will be able to apply the same tax treatment on the receipt of those proceeds that applied when they transferred their original interest in the home to their ex-spouse or civil partner.

The law aims to confine PRR to the occupation of a dwelling-house as a place of residence, and therefore challenges cases where the taxpayer’s acquisition, or some later expenditure on the property, was “wholly or partly” for the purpose of realising a gain. In such cases PRR is denied altogether.

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

Total gain made

 on sale 

 

 

X

Periods of occupation

Total Period of ownership

Certain periods of absence may be treated as actual occupation meaning that, in some cases, the property may still qualify for relief in full.

 

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

  • Any periods of absence for whatever reason not exceeding three years in total
  • Any period of absence when employed outside the UK
  • Any periods not exceeding four years in total due to certain employment requirements.

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, 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.

Furthermore, any period of absence when living in job-related accommodation will qualify for PRR provided there is an intention to occupy the dwelling as a main residence in due course.

If a property is not immediately occupied when it is first acquired - for example, because essential repairs are required - HMRC will, by concession, allow a period of up to one year before commencement of occupation to be treated as a period of actual occupation as long as the house is then occupied as the only or main residence of the taxpayer. In exceptional cases, this period may be extended to two years.

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.

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

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.
  • It was empty 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. In addition to there being no lettings relief, PRR is also reduced because the relief only applies for the final nine months of ownership.



  

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

The PRR rules were amended so that 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 for that tax year, or stayed overnight in the property at least 90 times in that tax year. The new rules apply to a UK-resident individual disposing of an overseas residence just as they do to a non-UK resident disposing of a UK residence.

Any night spent by an 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). Where 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, consideration should be given to the possible impact this may have on your residence status under the statutory residence test.

Where PRR is not available, or is only partially available, a UK land disposal return must be filed, and a payment made on account of CGT, within 60 days after the completion of the sale.

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