The emergence of a significant capital gains tax is one of the major concerns that we all face when selling our property.
What if we told you that, in certain circumstances, you could be exempt from such tax liability for disposing of your property?
Yes, you read that correctly. You may be exempt from capital gains tax on the sale of your property, but it must be your only or main residence. This relief is known as Private Residence Relief (PRR) or Principal Private Residence Relief (PPR).
As simple as it may sound, some requirements must be satisfied to qualify for PRR. Read on to learn about PRR in more detail and how you can be eligible to claim PRR.
Defining Private Residence Relief
Private Residence Relief (PRR) is an exemption relief that reduces capital gains rather than deferring them to a later date.
It allows you to replace your existing home with another of a similar value while ensuring that the gain on the sale of the old home is not subject to capital gains tax.
The term ‘Private Residence’ means a ‘dwelling house’, the gains on the disposal of which will qualify for PRR. TCGA 1992 (Sch 1B) has defined ‘dwelling house’ as:
"A building is a dwelling at any time when it is used or suitable for use as a dwelling or is in the process of being constructed or adapted for such use."
Therefore, a dwelling house means not only the main building but includes any relevant buildings adjoining it, such as garages, outhouses etc. A private residence may also include gardens and grounds, provided that the total area, including the site of the house, does not exceed half a hectare.
However, if HMRC is satisfied that the entire area is required for the 'reasonable enjoyment' of the property, they will allow a larger area to qualify for PRR.
Private Residence Relief is available to individuals, trustees of settled property, and personal representatives. However, companies are not entitled to the amount.
Conditions for Private Residence Relief
To be eligible for a full PRR, you must meet the following requirements:
- You have one dwelling house that you’ve lived in as your primary residence throughout your ownership period
- You haven’t been absent, other than an allowed period of absence or because you’ve been living in job-related accommodation, during your ownership period
- The grounds, including all buildings, are not greater than half a hectare (5,000 square meters)
- You haven’t used a part of your home exclusively for business purposes
- You didn’t purchase it merely for financial gain
If the above-mentioned requirements are satisfied, you will automatically be qualified for full PRR; hence, you are not required to pay capital gains tax.
Partial Private Residence Relief
One thing to bear in mind is that PRR is restricted when you only meet some of the above-mentioned conditions. Therefore, you’ll be qualified for partial PRR.
You must calculate the gain you made immediately following the disposal of your private residence, as you must report and pay any capital gains tax within 60 days.
This is generally when the annual exempt amount is used, and no losses can be used to offset the gain.
Calculating Private Residence Relief
You can calculate Private Residence Relief as follows:
Gain X Period of Occupation / Period of Ownership = Private Residence Relief
The period of ownership begins on the date the purchase is complete, and you have the right to occupy the property.
Therefore, if you’ve lived in your private residence throughout the whole period of ownership, 100% of the gain is exempt, and no gain is chargeable.
For the calculation of PRR, ‘Occupation’ means both actual occupation and deemed occupation.
Generally, deemed occupation is defined as periods when the individual is physically absent from the property but for PRR purposes, they are treated as living there.
Different Scenarios for Private Residence Relief
Let's look at different situations and how private residence relief can be calculated in those respective areas.
The final nine months of the ownership period always qualify for PRR, no matter how many properties you own or where you live. However, the property must have been your only or main residence for at least some point during the ownership period.
For example,
You purchased a property in May 2010 for £100,000 and resided in it for nine years before moving into another property in May 2019. The property remains vacant from that date and is disposed of in May 2022 for £180,000.
Since the property has not been your only or main residence throughout the ownership period, private residence relief is restricted.
The property has been occupied for 108 months in total. The remaining 9 months of the ownership period can be added, giving you a total of 144 months. Therefore, you’ll be qualified for private residence relief amounting to £65,000 (£80,000*117/144).
The remaining £15,000 will be subject to capital gains tax, although any available losses or the annual exempt amount may be deducted from it.
The first two years of ownership also qualify for PRR if there is a delay in moving in after purchase, provided that the following conditions are met:
- The property was under construction, being renovated, or you couldn’t sell your old residence, and
- You occupied it as your primary or only residence within the first two years of ownership.
For example,
You purchased a property in May 2010. However, you only moved to the property in May 2011, which required major refurbishments. Subsequently, it was your only and main residence.
The house was sold in 2020. You’re eligible for full private residence relief on the disposal of the property.
If you have one residence or nominated your residence, certain periods of absence also qualify for PRR depending on the reason for and the length of absence.
- Absence for any reason not exceeding three years
- Absence of any length due to employment or office outside the UK
- Absence of up to four years due to the place of work
It is extremely important to remember that a period of absence will only qualify as deemed occupation if it was both preceded and followed by actual occupation. Therefore, the residence must have been occupied by you both before and after unless your work prevented it.
For example,
You purchased a property in May 2010. However, you only moved to the property in May 2011, which required major refurbishments. Subsequently, it was your only and main residence.
The house was sold in 2020. You’re eligible for full private residence relief on the disposal of the property.
If you only own one residence, the final period exemption is extended to 36 months if any of the following apply:
- You or your spouse/civil partner is disabled
- You or your spouse/civil partner is in a long-term residential care
- You disposed of the residence before 6 April 2014
Additionally, if none of these situations apply, you will receive relief for 18 months if you sell the house before 6 April 2020.
For example,
You purchased a property in May 2010 and lived there as your only or main residence. However, in May 2022, your work obliged you to work abroad, and you came home in 2020.
After returning, you again resided in the house as your only or main residence. The house was sold in 2022.
Given that you resided there both before and after, you’re eligible for full private residence relief on the disposal of the property.
Owning more than One Property
Where you own more than one property, the focus shifts to the main residence rather than the only residence. Therefore, it’s important to determine which of the properties is your main residence for the purpose of PRR.
Nominating a Home
If you own more than one residence, you may nominate any one of them as your main residence for the purpose of PRR within a given time limit.
However, the property must have been your only or main residence for at least some point during the ownership period.
Every time your combination of properties changes, you must nominate a home within two years.
For example,
You purchased a property in May 2010 and lived there as your only or main residence. In May 2015, you purchased another property in which you resided as a second home.
You can nominate your original or second home as your main residence. However, the nomination must be made by May 2017.
How to Nominate
You can write to HMRC to nominate one residence as your main residence. Include the address of the house you want to nominate, and each owner of the home must sign the letter.
Did you know?
Rules for Couples
There is a provision of only one residence per couple, whether married or in a civil partnership, which counts as the primary residence for any given period.
Claiming Private Residence Relief
Once you’re qualified, you can claim private residence relief.
To claim the relief, write ‘Private Residence Relief is claimed’ and the amount of relief claimed in box 54 on page CG 3 of your computation of the gain on any relevant disposal.
Frequently Asked Questions
If you incur a loss on the disposal of your residence, then the loss will not be allowable and can’t be used to offset against any gains you’ve made.
From 6 April 2015, if you disposed your UK residential property while non-resident, you must notify HMRC within 30 days of the transfer. Any gains you make will be subject to capital gains tax.
Yes, you can claim private residence relief for UK residential property. From 6 April 2015, you must be resided in an overseas property for at least 90 days during the tax year to be eligible for relief.
Yes, private residence relief and letting relief can be claimed in some circumstances. You must fill out box 8 of your computation of the gain with code PRR or LET, depending on whether letting relief applies or not.
