Private residence relief: pitfalls for the unwary

TaxTalk - June 2024

read timeRead time: 21 mins

Principal private residence relief, or private residence relief (PRR), is a Capital Gains Tax (CGT) relief that can prevent a tax charge when someone disposes of or sells a residential property which they have used as their home. We outline the key pitfalls to be aware of.

Where a taxpayer owns a home and lives in it as their only or main residence throughout their period of ownership, any gain made on sale or disposal is usually exempt as it’s wholly covered by PRR. But this is not always the case – the rules have nuances and can be misunderstood. 

To benefit from the relief, the taxpayer must generally meet all the following conditions:

  • have one home and have lived in the property as their main residence during the entire period of ownership
  • have not let part of the property out (although having a lodger may not rule out the relief)
  • have not used part of their home exclusively for business purposes
  • the grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total
  • have not purchased the property just to make a gain.

Where all of these apply, any gain is usually wholly covered by PRR with no CGT liability or reporting requirement to HMRC. Otherwise, there could be a reporting requirement and/or a tax liability. For example, if the taxpayer has been absent from the property during part of the ownership period or if they own more than one residence. The rules are also different if they sell a property that’s not their home or if they live abroad.

Absence from the main residence

Where the property has not been occupied as the taxpayer’s only or main residence during the entire period of ownership, PRR generally applies to the period the owner was in occupation. The last nine months of ownership are treated as a period of qualifying occupation (and this period is increased to 36 months if the owner goes into care), so long as the property was their only or main residence at some point.

Note, too, that where the individual is absent from the property and has no other residence eligible for PRR, some other periods of absence can be treated as periods of residence for the purposes of the relief.

Deemed periods of occupation

 The legislation specifies three periods of absence that can count as deemed occupation for the relief, as follows:

  • any periods of absence of up to three years
  • where the taxpayer is overseas for employment (or is accompanying their spouse or civil partner who is working abroad and who meets the conditions) – an unlimited period
  • where the taxpayer is prevented from living in the property due to working elsewhere, or lives with a spouse or civil partner who is working elsewhere – a maximum period of four years.

To qualify as deemed occupation, the property must have been the taxpayer’s only or main residence before and after the period of absence. But there may be exceptions in the second and third cases above. This is where the taxpayer is prevented from re-occupying the property, either because of their work location or as a condition of their employment in order to secure effective performance of their duties. The same may apply if the taxpayer is the spouse or civil partner of an individual in this situation.

Other pitfalls

PRR can be straightforward and apply automatically without the need to claim or report to HMRC.

The position is more complicated where a taxpayer has another residence. This may involve nominating one property as their main home for the purposes of the relief. There are separate rules regarding the eligibility to PRR where the property is in the UK and the individual is not a UK resident. There are also cases where the relief is not automatic and must be claimed.

But greater complexity can bring opportunities. There can be alternative ways to calculate capital gains and elections may be possible to mitigate tax.

How to report to HMRC

When someone is selling or disposing of a residential property, it’s important to check the UK tax position as soon as possible.

PRR may apply automatically with no tax charge and usually no reporting requirement to HMRC.

But where tax does arise on the disposal of UK residential property, a CGT return must be submitted to HMRC and tax paid within 60 days of the sale completion.

There are circumstances where a CGT return with the same deadline is required where there is no tax liability – such as when the taxpayer is not a UK resident. Non-UK residents must also submit a CGT return if they make certain indirect disposals of UK land and property such as shares in a company deriving 75% or more of its gross asset value from UK land or property.

To submit a CGT return, first register with HMRC and create a ‘CGT on UK property’ account. Because of the 60-day deadline, individuals should review their UK tax position well in advance to avoid incurring late filing penalties, late payment penalties or interest charges for late paid tax. Professional property valuations may also be needed, so take advice at an early stage.

How we can help

If you are thinking of disposing of or selling UK residential property, we can advise on your UK tax position. We can review the availability of CGT reliefs, complete and submit CGT returns to HMRC, and advise regarding any tax liabilities.

For more information, please contact Jonathon Collins.