A gain made on the disposal of an individual’s only or main residence is exempt from Capital Gains Tax (CGT) thanks to the tax relief known as ‘Principal Private Residence Relief’ (PPRR).
Where a property has only ever been used as the owner’s sole residence, the operation of PPRR is straightforward; for example:
Anne buys a property in Hawkshead for £200,000. She lives in it for 15 years and sells it for £400,000, making a profit of £200,000.
The amount of PPRR she can claim is calculated by multiplying the profit made (£200,000) by the length of the ‘qualifying period’ (15 years) divided by the period of ownership (15 years). In Anne’s case then, the PPRR is £200,000 x 15/15 = £200,000.. There is no tax to pay because of PPRR.
However, and because this relief is potentially so valuable to anyone who owns a property, the law is very specific about what conditions must be met in order to make a valid claim. The main one is spelled out in its name– ie, the property must have been your only or main private residence - so the first (and perhaps obvious) questions you will need to ask yourself before making a claim are a) was the property ever your ’residence’, and b) was it ever your ‘main’ residence (for at least some of the time it was owned).
The following might help you consider those questions further:
- was the property ever your home, or one of your homes?
- which address did your bank statements, bills and general correspondence get sent to? (all these items would generally be sent to the main residence)
- did you pay full council tax at the property? or did you claim a council tax relief that is inconsistent with occupancy as your residence?
- where did you tell people you lived during the period in question? eg, the DVLA, the DWP, HMRC, or your employer?
- does gas, electricity usage at the property suggest it was lived in as a residence?
- what were your intentions when you moved in to the property – eg, is it clear that the residence was only ever intended to be temporary? Did you put it on the market before you moved in or soon after? Are you a builder who makes a habit of renovating property and claiming PPRR? (if any of these questions are answered in the affirmative PPPR is unlikely to be available)
- do your family circumstances tend to confirm the property as a residence, or do they suggest otherwise?
- whilst there is no ‘minimum period’ of occupation, what was the length and quality of occupation? Did you reside there on a regular basis or intermittently?
- was the property acquired wholly or partly for the purpose of realising a profit? (If so it doesn’t qualify for PPRR).
- was any part of a house used exclusively for business purposes? (If so it doesn’t qualify for PPRR).
If you can answer all the above in a way that suggests you are eligible for PPRR, you may be on the way to securing significant tax savings on a sale of the property. The tax relief may be worth even more than you think because the ‘qualifying period’ for PPRR purposes includes not just periods of actual occupation but also the following deemed periods of occupation:
- the first 12 months of ownership if you can’t sell your old home or need to refurbish the new home before moving in
- any absence of up to three years.
- any period in which you were required by your employer to live in job-related accommodation.
- any period in which you were required by your employer to work full-time overseas
- any period of up to four years in which you were required to work away from home in the UK.
- the last 18 months of ownership
Mike bought a house in Ambleside in 2012 for £200,000 and lived in it for a year. He then obtained a long term work contract in London so he bought a flat for £200,000 and moved there for the 4 year duration. In 2017, when the contract ended, Mike sold the flat and returned to live in the house in Ambleside before selling in 2018.
He made good profits on the sale of both properties but had no CGT to pay because of PPRR.
In addition, if you qualify for PPRR, and you let the property out for part of the period of ownership you will also qualify for ‘Lettings Relief’. This gives a deduction from your profit which is the lower of:
- the amount of any gain attributable to the letting period
- the amount of PPRR available
Mike bought a house in Ambleside on 1.1.2012 for £200,000 and lived in it for a year. He then rented the Ambleside property out to tenants until 31.12.14. In the meantime, he took a lease on a National Trust property near Coniston to live in himself. The Ambleside property was empty from 1.1.15 until 1.1.17, at which point Mike returned to live there. On 1.1.18, he rented another National Trust property in Kendal.. He sold the Ambleside property on 31.12.19 for £350,000, making a profit of £150,000.
In total Mike owned the property for 8 years, it was his main residence for 2 years, he is in deemed occupation 4.5 years., and he let the house out for 2 years. So does he owe any tax on the £150k profit he’s made?
Actual occupation and deemed occupation total 6.5 years, so PPRR is £150,000 x 6.5/8 = £121,875.
Letting Relief is the lower of:
iii) the gain attributable to the letting period of 2 years (£150,000 x 2/8) = £37,500
iii) the PPRR available = £121,875 (see above)
The £150,000 profit is therefore extinguished by £121,875 PPRR + £37,500 Letting Relief, and Mike has no tax to pay.
For people who own more than one ‘residence’, it is also important to consider the rules regarding multiple residences and PPRR.
If you have more than one ‘private residence’ it is possible to make an election to nominate any one of them as your main residence (and thus render it eligible for PPRR) by making an election to that effect, but that election has to be made within 2 years of acquiring the additional residence.
Once you’ve made a valid election HMRC have to accept it. For example, they can’t insist that you treat your ‘weekday home’ as your main residence if you’ve already nominated your ‘weekend retreat’ as your main residence.
Conversely, if you fail to make the election in time, HMRC can make the decision for you. So, in the example above, HMRC would most likely conclude that the ‘weekday home’ is ‘most occupied’ and is therefore your main residence, and that won’t be helpful if it doesn’t give you maximum tax relief!
If you’ve missed the 2 year window, one way you might get a second bite at the ‘PPRR election cherry’ is to acquire another residence (a rental will do), because the time limit for making an election is 2 years from acquiring each additional residence – ie, the two year window reopens if and when there is a subsequent acquisition.
31.12.2012 - residence 1 acquired
31.12.2014 - residence 2 acquired
31.12.2016 – you are out of time to make the election re residences 1&2, so HMRC can decide for you which is your main residence!
31.12.2019 – residence 3 acquired, so now you have another 2 years to elect which of residences 1,2&3 should be nominated as your main residence
Finally, it is possible for the property owner to vary the main residence election within 2 years of making it, which means two or more residences may benefit from PPRR for at least some of the period of ownership.
31.12.1980 – residence 1 acquired
31.12.2014 - residence 2 acquired
31.12.16 – an election is made to have residence 2 treated as main residence
31.12.18 – the election to have residence 2 treated as main residence is varied, so that property 1 is nominated as main residence instead
In this case both residences will benefit from PPRR during the periods they are the main residence, and, as a result, both properties will also benefit from access to ‘Deemed Periods of Occupation’ and ‘Lettings Relief’ as outlined above.
NB. Changes are due to be introduced in April 2020 which reduce the deemed occupation period at the end of ownership and more or less abolishes Lettings Relief – see https://suttonstax.co.uk/blog/post/sell-now-pay-less-tax - so if you are considering a sale in the near future you should work out your options now.
If you would like to discuss the tax implications of any planned property disposals please call me on 01539 432540 to arrange a free initial consultation. Alternatively, please email firstname.lastname@example.org outlining what you’d like to discuss.