If you own a property which has always been occupied as your main home it is likely that any capital gain realised on its sale will not be taxable because it is relieved by Private Residence Relief (PRR).
If you have not always lived in the property -Private Residence Relief (PRR) may be available to relieve some of the capital gain realised.
You must have occupied the property as your main home at some point during your period of ownership for Private Residence Relief (PRR) to be available at all.
There is a misconception that occupying a property as your home for a short period before selling it will exempt the whole capital gain. Sadly this is not true. Private Residence Relief (PRR) is applied to the fraction of the capital gain attributed to the time the property has been occupied as your home – plus the last 9 months of ownership (regardless of whether you were living in the property at the time).
What happens if you live in two homes?
- Only one property can qualify for PRR at any one time (except from the last 9 months of ownership) and married couples can only have one Private Residence Relief (PRR) property between them.
- Within two years of acquiring (or occupying) a second home-consider making an election to elect which property to be treated as your Private Residence Relief (PRR) for tax purposes.
- Once in place this election can be varied. If an election is not made you risk HMRC making the decision for you – although in practice your PRR is often based on fact.
What happens if you can’t be physically present in your home for a period of time?
- ‘Permitted periods of absence’ include – living abroad or being required to live elsewhere by virtue of your employment which may qualify for PRR – even though you are not living in your home.
- Conditions will need to be satisfied for these ‘permitted periods of absence’ to be available.
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%.
- If you own properties which were once your home but haven’t been occupied for a period of time or require advice on making (or varying) PRR elections
- Before you commit to selling a property that was once occupied as your home speak to us to help you determine how much PRR will be available.
Capital Gains realised on the disposal of residential property are reported to HMRC together with the Capital Gains Tax payable within 30 days of completion.
That’s no time at all!
