Private Residence Relief (PRR) is a generous tax saving. If the conditions are satisfied – it allows you to sell your only (or main) home without having to pay Capital Gains Tax (CGT).
The pandemic has resulted in many of us reassessing where we want to live and work – and we are seeing an increase in the value of residential property in the UK.
If you are thinking of selling your residential property this is a good time to assess your eligibility for Private Residence Relief before you sell.
The PRR legislation is complex and unexpected tax bills can arise for the unwary. We’ve seen instances where PRR is not available in full, here are just a few examples:
- If the garden/grounds of your property exceeds 1.236 acres or (0.5 hectares) PRR will only be available if the additional area is required to enjoy your home. A judgement call will need to be made, valuations obtained, and cost apportioned, to decipher how much PRR can be claimed when the property is sold.
- If you’ve fenced off some of your garden hoping to sell it for development HMRC will try and argue that this is not required to enjoy your home and you may have to pay CGT on the part of the garden you’ve fenced off when you sell your home.
- If you sell and move out of your home but keep part of the garden with a view to selling it for development at a later date PRR will not be available when the plot is sold because you no longer own your home. However, if you keep the garden with a view to building a new home on it for yourself it may attract PRR when you eventually sell, providing you are able to occupy the new home within two years. If it takes longer than that you will only be eligible for PRR when you occupy the property.
- If during your ownership you have moved out to travel, are required to live elsewhere as a result of work, or more recently lived elsewhere to care for family members and have not been able to re-occupy your home as your home prior to its sale PRR could be restricted.
- If your home has been used for more than occasional business use PRR will be restricted. If you have you adapted part of your home to be used solely to operate your business from and/or have taken in lodgers and the income from renting rooms exceeds £7,500 per annum.
- If you own a second home and have spent equal amounts of time between the two, HMRC may determine which is your main residence. Eligibility for PRR will be based on fact, unless a PRR election has been made.
A successful PRR claim relies on there being quality family occupation over time. So, if you buy a property, renovate it in a short period of time and then sell it before doing the same thing all over again, expect HMRC to argue that you are trading. You may be charged Income Tax on profits realised at a maximum rate of 45%.
In recent years we’ve seen HMRC challenge PRR claims. If you have a large garden, have not continually occupied your property as your home throughout your entire period of ownership, or use part of it for a dedicated business purpose we will help you determine how much PRR you can claim and calculate the likely amount of CGT payable prior to its sale.
Don’t forget that residential property gains need reporting and CGT paid to HMRC within 30 days of completion!
Call Sarah Tucker on 01223 810100 for a range of property tax advice.
