Private Residence Relief: Do You Know When You Can Claim?
If you sell a property which is your only residence and has been your only home throughout your period of ownership, you will not be required to pay Capital Gains Tax (“CGT”) if a capital gain arises on the disposal. This is because Private Residence Relief (“PRR’) is available for the full period of ownership, reducing any chargeable capital gains to nil.
This also applies if you own several residences and have elected for one to be your main residence for PRR purposes (please see our previous article Principle Private Residence “PRR” Elections: Your Options for further details of this).
Furthermore, if you sell a property which is not your main residence at the date of disposal but has been at some point during your period of ownership (for example a property currently being used as a rental property/second home), PRR will still be available in relation to the periods of only/main residence in order to reduce the chargeable gain and any CGT payable.
The PRR available is calculated by considering the periods when the property was occupied by you as your only or main residence as a fraction of your total ownership period and applying this to the chargeable gain. The last nine months of ownership are always deemed as occupation for PRR calculation purposes, in addition to some other periods of absence from the property (including working abroad by reason of employment, working elsewhere for up to four years or absence for any reason up to three years – however, these periods would need to be preceded and followed by a period of actual occupation).
Further Points to Note
Definition of Private Residence
Dwelling houses (main buildings and adjoining buildings including garages and outbuildings and separate buildings occupied by other family members) and gardens and grounds can qualify as part of your private residence in full provided that the total area including the site of the house does not exceed half a hectare. That said, HMRC may accept a larger area if it is necessary for the ‘reasonable enjoyment’ of the property. Please see our previous article A Character Study: PRR and Gardens & Grounds for further details of this.
Business Use of Property
PRR is restricted if any part of the property is used exclusively for business purposes; any gains would need to be apportioned between business and private use before PRR is considered.
From 6 April 2020, if you let out a property that you reside in Lettings Relief may be available to reduce any chargeable capital gains that arise on the disposal of the property. In this instance, the Lettings Relief available would be the lower of £40,000, the total amount of PRR available, and the gain arising as a result of the letting.
It should be noted that if you have a single lodger, then this may not restrict the availability of PRR. Therefore, Lettings Relief is typically relevant where there are two or more tenants living in your home or where part of your home is let out as residential accommodation.
Please note that prior to 6 April 2020, Lettings Relief would have been available if you had lived in the property at some point as your main residence but had then let it out and lived elsewhere – however, this is no longer the case.
If you are selling a property which has been your main residence at some point during your ownership, you should consider whether you can claim PRR on the disposal. If you require advice or assistance with the calculations (which can be complex) please contact a member of our team.