In most cases, when a person disposes of an asset in the UK, including both residential or commercial property, they will be liable to pay tax on any capital gains made on that disposal. However, under the private residence relief rules, a qualifying homeowner can often avoid paying Capital Gains Tax altogether when selling their home.
In this guide, we explain what PRR is, when it is available and how it works in practice.
What is private residence relief?
Private residence relief is a form of tax relief available to homeowners on the sale of a private residence, where a homeowner would otherwise have to pay Capital Gains Tax (CGT) on any gain they make if they dispose of a dwelling house which is their home, as well as part of a dwelling which is their home or part of the garden attached to their home.
A homeowner may be entitled to relief either if they own the freehold of their home or if they are a tenant owning a leasehold. They may also be able to get relief if they jointly own the freehold or leasehold with someone else. Trustees of settled property and personal representatives can claim relief in certain circumstances, but companies do not qualify.
What are the requirements for private residence relief?
Under the private residence relief rules, a homeowner will be entitled to full relief where all of the following conditions are met:
- the dwelling has been their only or main residence throughout the period of ownership
- they have not been absent, other than for a permitted period of absence(s) or because they have been living in job-related accommodation, throughout the period of ownership
the garden or grounds, including any buildings on them, are not greater than the permitted area - no part of their home has been used exclusively for business purposes throughout the period of ownership, where using a room as a temporary/occasional office does not count
- they have not let part of their dwelling out, although this does not include a single lodger.
If all of these conditions are met, the homeowner will not usually have to pay any CGT, provided they did not acquire the dwelling and/or spend money on it with the sole intention of making a gain on its disposal. This could be, for example, where a house is bought to sell it on quickly at a profit or a freehold is bought to maximise profit on the sale.
Which properties qualify for private residence relief?
For the purposes of private residence relief, if someone lives in two or more houses, they can only have one main residence. However, they can nominate which residence is to be treated as their main residence, provided that nomination is made within 2 years of the date from which they own both residences. For example, in 2006 a person buys their first house and in May 2021 they buy another house which they occupy as their second home, they must nominate which property is to be their main residence by May 2023.
When two homeowners get married or enter into a civil partnership, and they continue to use both residences, they can jointly nominate which is to be their main residence, where the 2-year period for this will begin on the date of the marriage or registration. This is because for spouses or civil partners, only one home per couple counts as their main home at any one time. This means that, as with any other homeowner, having nominated a home, they cannot get relief for another property for the time that dwelling is nominated, apart from for the periods that always qualify for relief (see ‘absences’ below).
Importantly, if there is a change in the combination of residences owned by an individual or joint owners, a new 2-year period will begin. If the owner(s) fail to make a nomination, the question of which is their main residence will be determined by HMRC on the facts.
Private residence relief absence rules
When it comes to permitted absences under the rules, the homeowner’s entitlement to full private residence relief will depend on how long they have been absent from the property and the reasons for this during their period of ownership. A homeowner may get less relief if they live away from their home, but they will still get some relief for certain periods.
The period of ownership for private residence relief begins on the date a dwelling house is first acquired, or on 31 March 1982 if that is later, and ends on the date of disposal. The last 9 months of ownership will always qualify for relief, regardless of how the property has been used during that time, provided it was the homeowners only or main residence at some point. A homeowner will also get relief for up to the first 12 months that they owned their home if it was being built, renovated or they could not sell their old home, even if they nominated a different home as their main home. In exceptional circumstances, HMRC may also allow a homeowner to treat a longer period, of up to 2 years, in the same way.
Other periods of absence that can be discounted for the purposes of private residence relief include where the homeowner is away from their home for any reason for periods adding up to 3 years, for up to 4 years if they had to live away from home in the UK for work or for any period that they were working abroad. However, the homeowner must have lived in the home both before and after any absence, unless their work prevented them from doing so.
What is the permitted area for private residence relief?
If the garden and grounds to a property are less than 5,000 square metres, which is a little over one acre, the homeowner will be entitled to private residence relief for all of it. This means that any outbuildings included on the land but not part of the dwelling house will still attract relief, provided they fall within the permitted area.
However, even if the garden and grounds exceed 5,000 square metres, the permitted area may be extended by HMRC, where larger grounds are essential for the reasonable enjoyment of the property taking into account the size and character of the dwelling house.
Private residence relief for business purposes
If part of a dwelling house is used exclusively for business purposes, that part will not qualify for private residence relief. This means that if a property comprises a shop with living accommodation, the owner will only be entitled to relief for the latter. As such, if they sell the property, they should split any gain between the gain made on the shop, which may be chargeable, and the gain made on the accommodation, which will attract relief.
Equally, if a homeowner lets out part of their property as residential accommodation, unless this is a lodger who shares a living space with them, they may only be entitled to partial relief. However, how much they must pay in tax will depend on how long they have lived in their home, where they may be entitled to further relief. This is known as letting relief, where the amount of relief is either the lowest of the amount of private residence relief already calculated, £40,000 or the amount of any chargeable gain made because of the letting. For example, if a person lets 60% of their house as residential accommodation and occupies 40% as their home, and makes a gain of £60,000 when they dispose of the property, they will be entitled to private residence relief for 40% of the gain, which is £24,000. The remaining gain of £36,000 all results from the letting, where the lowest of the three limits is the amount of private residence relief and so they will be entitled to additional letting relief of £24,000. Accordingly, their chargeable gain will be £12,000.
If a homeowner lets out all of their property, they will still get full relief for the years that they lived in their home, plus the last 9 months that they owned the home, even if they were not living there at the time. However, they will not be entitled to letting relief, where this is only available where the owner is sharing occupancy of their home with a tenant.
How to calculate private residence relief entitlement
A homeowner may need to pay some tax if they do not qualify for full private residence relief, although how much relief they can deduct from any gain to calculate the chargeable gain can be tricky. Much will depend on the reason(s) why only partial relief is applicable, where the gain will first need to be split accordingly before applying any relief.
When calculating the proportion of the gain eligible for relief where the dwelling has not always been the homeowner’s only or main residence, the total gain must be multiplied by a fraction equal to the period of occupation, including periods of allowed absences and any part of the final 9 months not covered by actual occupation or allowed periods of absences, divided by the period of ownership. In this context, if a person buys a property in January 2013 and sells in January 2023, having lived there for the first 8 years and lived elsewhere for the last 2 years, the dwelling will qualify for private residence relief for 105 out of the 120 months of the period of ownership. This represents a period of absence of 2 years, but minus the last 9 months which still qualifies for relief. As such, a proportion of any gain made from the disposal amounting to 105÷120 will qualify for relief.
If, on the other hand, part of the home is used exclusively for business purposes, or part of it is let out, the total gain must be split between the business or the let part, which is chargeable, and the homeowner’s own living accommodation, which is exempt. There are different ways of calculating partial relief where other scenarios apply, for example, where a homeowner has had more than one home, but is nominating a property as their main home for part of that time, or where private residence relief and letting relief apply. There is a useful online tool at GOV.UK that can be used to see if a homeowner is eligible.
Importantly, if a loss is made on the disposal of a home, and the homeowner would have been entitled to private residence relief if they had made a gain, their loss will not be an allowable loss. This means that they will not be able to offset any loss against any capital gains. However, if private residence relief would not have applied in full on the disposal, it may be possible to offset the loss which relates to the part which did not qualify for relief.
Private residence relief & reporting capital gains
Where a homeowner is entitled to full private residence relief, they will not need to declare this, provided they have made no other disposals or chargeable gains and do not wish to make any capital gains claims or elections. If all the eligibility requirements apply, they will automatically get full relief and will have no tax to pay. However, if they are only entitled to partial relief, they will need to complete the CGT summary pages of their tax return. CGT must be reported and paid on most sales of UK property within a period of 60 days.
The information to be submitted to HMRC will depend on the circumstances surrounding any claim for private residence relief, and what rules comes into play. For example, if the garden and grounds of a residence exceed 5000 square metres, and all of garden and grounds have been disposed of, a detailed explanation must be given as to why it is believed that all or part of this disposal is exempt from Capital Gains Tax. The District Valuer will then be asked by HMRC to determine the size and location of the permitted area. As such, in these and other complex cases, specialist advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
