Tax & Admin

Private Residence Relief: Lowdown On What It Is And How It Can Benefit You

Allison S Robinson | 23 November 2021 | 2 years ago

Private Residence Relief

In the past, when a person made the decision to sell a property in its entirety or partially, such as subdividing your large garden, you would have had Capital Gain Tax (CGT) in the back of your mind. Here is a guide to the latest news on CGT, Private Residence Relief and Partial Private Residence Relief.

Private Residence Relief impact on CGT

When a property deal has happened, the seller used to land up with a hefty CGT on any profits (gains) made on that property deal. There have been legislative changes that, subject to certain qualifying criteria, might deem you to qualify for full relief, or at least partial relief, on tax calculated on those profits. The CGT tax relief legislation is called the ‘Private Residence Relief’ (PPR).

Explaining Private Residence Relief

The Private Residence Relief legislation, or PRR, is valuable relief for private property owners from the chunk of CGT that is normally automatically applied to private property sales originating within the borders of the UK.

CGT, however, does not only apply to private property. It is normally calculated on the profits achieved from the sale of assets like:

  • Personal jewellery
  • Personal paintings
  • Personal antiques
  • Personal coins and stamp collections
  • Personal sets of things, e.g. a chess set
  • A dwelling or place of living that is your main place of residence, which includes buildings defined as:
    • houses
    • flats
    • apartments
    • duplexes
    • semi-detached
    • cottages
    • fixed caravans
    • houseboats
  • A section of your main place of living
  • A section of your plot, e.g. a subdivision of your garden
The Private Residence Relief, however, only applies to property deals, not all CGT categories.

What are the qualifying conditions for Private Residence Relief?

If you have processed a private property deal, then you must ascertain if the conditions listed below are being met before assuming that you qualify for the entire relief quota:

  • The residence that has been sold has the primary or only residence of yours for your ownership tenure, i.e. you lived in it more than any other property.
  • Throughout your ownership of the property, you did not reside in another residence.
  • If you were absent, it was for allowable reasons, for example:
    • You were not able to live in the property when you first bought it because there was a significant renovation or rebuild construction project happening which made it uninhabitable.
    • You remained in the property you were selling and did not take up residence in the new home because the sale of the existing property was not being achieved.
    • The above two conditions have a window period of up to 12 months from the date of buying the new property. You can then still define this new property as your main residence.
  • The footprint of the property and its gardens, including any and all buildings within this area, is not bigger than the size parameters or area (see below).
  • You have not worked from home in an exclusive area dedicated to running your business, i.e. a converted shed that is a dedicated office. No section of the buildings or property has been specifically and solely set aside for the conducting of a business, i.e. exclusively use a garage for packaging merchandise and not personal storage or parking of cars.
Meeting each of the above conditions will waiver your obligation to submit a CGT payment on any profits achieved from the property sale.

In addition, you will not need to complete the CGT summary sections of your tax return if:

  • You have made no other disposals
  • You do not need to submit any capital gains claims

What is partial Private Residence Relief?

All is not lost if you have reviewed the above criteria and cannot tick all the boxes. Even if each of the full Private Residence Relief criteria above is not met, you can still consider assessing whether you still qualify for, at least, partial relief.

The process to follow to ascertain if you do qualify in any way for partial Private Residence Relief is to fill out the CGT tax return summary pages. HMRC will review whether you qualify for partial Private Residence Relief.

What disqualifies a property owner from Private Residence Relief?

Suppose you have ticked all the above criteria and it looks like you do qualify for Private Residence Relief. In that case, it is important to note that there are contra-conditions that might disqualify you from receiving Private Residence Relief. These are as follows:

  • If you purchase a dwelling or property with the aim of flipping the property, otherwise known as fix-to-sell, invest capital into it and realise a gain when you sell it, that is deemed property trading and does not qualify for Private Residence Relief.
  • If you sell your home or dwelling first in one deal and thereafter you sell part or all of the land that constitutes your garden, i.e. land attached to the dwelling, the second deal does not qualify for Private Residence Relief.
  • If the selling of your main residence falls within qualifying criteria for Private Residence Relief but, unfortunately, a loss is made on the sale of the dwelling, you are not permitted to use the loss as an offset against any profits made on other deals.
  • This ruling is also applicable to partial Private Residence Relief and partial loss.

Does everyone qualify for Private Residence Relief?

This legislation is open to every UK resident to receive Private Residence Relief on profits achieved through the sale of their primary home or sole residence. As detailed above, there are conditions to be assessed against, as well as:

  • When you are working out the profits that would normally attract CGT, there is no Gift Hold-Over Relief that a resident had received as a result of a prior property sale. You are obliged to declare this Hold-Over relief under the Taxation of Chargeable Gains Act 1992 (section 260).
  • If you have already received Gift Hold-Over Relief relating to transfers made before December 10th, 2003, this receives special treatment via separate transitional rules, which might still allow Private Residence Relief to apply.
  • Residents qualify for Private Residence Relief if they are the owners of the home freehold, or they are lease-owning tenants.
  • Residents in joint ownership of a tenant lease or home freehold may also qualify for Private Residence Relief.
On another note, due to new legislation passed, any non-resident disposing of residential property within the United Kingdom, fully or partially, from 6 April 2015, has 30 days within which to submit a notification to HMRC. Note: The deal might attract CGT if profits are realised.

What do the different Private Residence Relief terms mean?

To fully understand the criteria, inclusions and exclusions of the Private Residence Relief Act, here is an overview of explanations for key terms that are generally used:

Dwelling/house – The definition of a dwelling or house is:

  • A single building, for example, a detached house.
  • A house plus another building such as a house and a freestanding garage or a separate granny flat.
  • A home comprised of multiple structures with several outbuildings, stables, a barn, woodturning shed, etc. However, not all the buildings may qualify for the relief.
  • Dwellings that are houseboats or fixed caravans also qualify for Private Residence Relief subject to the same criteria applied to apartments and houses.
Note: Should your main residence be located outside of the borders of the United Kingdom,  this is still a chance of qualifying for Private Residence Relief.

Note 2: The determination of whether or which buildings fall within the definition of a dwelling is guided by the size of the grounds or garden. If the area is larger than the area permitted (see below), then the determination becomes irrelevant.

Sole residence and main residence – If you are fortunate enough to split your periods of accommodation between 2 or more dwellings, then you need to select one for the purposes of relief, i.e. nominate the main residence (at any particular point in time) for the specific assessment of Private Residence Relief. It must also be where the majority of your time is spent.

The nomination of which dwelling will be submitted (at time of sale) as the main residence is NOT done at the time of sale. The main residence can be nominated for set periods of time. However, that nomination must be done within twenty-four months from when you first start residing in the combination of multiple dwellings.

As a multiple property owner, there’s a very good chance you may add or change the combinations of dwellings that you are sharing your time across. When a change occurs to the dwelling combination, the twenty-four month period restarts.

If you do not nominate a main residence, it will be made by HMRC based on the data available to them.

Period of ownership – The dwelling ownership period relative to you is from the date you legally come into possession of the property until you sell it.

Note: The 18 months period prior to selling your dwelling is also entitled to Private Residence Relief. This qualification applies regardless of the amount of use of the property by yourself during that period. The criterion is that it must have been your sole or primary residence at some time.

Period of absence – As defined earlier in this article, periods of absence are allowed:

  • If you were absent, it was for allowable reasons, for example:
    • You were not able to live in the property when you first bought it because there was a significant renovation or rebuild construction project happening which made it uninhabitable.
    • You remained in the property you were selling and did not take up residence in the new home because the sale of the existing property was not being achieved.
    • The above two conditions apply for up to one year from the purchase date of the new property. You can then still define this new property as your main residence.
  • There are exceptional circumstances for which you can apply to HMRC for approval. The period may not exceed twenty-four months.
  • There are additional circumstances that apply as allowable periods of absence, but you would have to reside in the nominated main dwelling before the absent period as well as after the absent period.
    • Any number of absences that do not total more than thirty-six months.
    • Employment-related absences due to work occurring outside the borders of the United Kingdom.
    • A total absence of forty-eight months or less when:
      • The distance from your home to your workplace hinders the feasibility of living there; or
      • An employer has made a formal request for you to reside closer to work to increase job efficiencies.
Garden or grounds – You can sell land (attached to the dwelling) and apply for Private Residence Relief if the size of the area is within the parameters set by HMRC.

Permitted area – The qualifying area size of the property footprint, grounds or gardens is no more than half a hectare which is 5,000 sqm, 538,196 square feet or just over an acre.

If the footprint is larger, you will most likely not qualify for full PPR; relief will only be on the permitted area. The size of a permissible area that was arrived at by HMRC is deemed to be an open area of land that is reasonably required to gain enjoyment of the dwelling as a main residence.

You must upload your property details onto the CGT summary pages with the sale and profit amounts. On those pages, you would also motivate why you believe that the whole or portion of the land and main residence should qualify for Private Residence Relief.

UK Government legislation updates

The UK government had announced a planned revision in the 2020 2nd quarter Budget. This revision was to launch additional restrictions on Private Residence Relief. However, this revision had the carpet pulled from under it when the COVID-19 pandemic started and greater priorities were pushed to the fore.

The relief reductions being made by HMRC

Over the past few years, the HMRC has consistently slowly reduced the qualifying parameters for Private Residence Relief.

Here are some of the examples of the adjustments made:

  • The period of absence that used to be allowed as a period of the occupation working abroad has been reduced.
  • The period of exemption, when occupation of the main property ends, is currently eighteen months. The new finance reduces this to nine months probably from 2021.
Recent court rolls are indicating that HMRC challenges of Private Residence Relief funds are on the increase. Discuss your claim with an accountant or lawyer to get the best and most current advice.

Summary

For many of us, CGT is not a concern when we sell our homes. Instead, land and buildings transaction tax (LBTT) is more likely to be a tax concern. If, for example, you own a second home and rent it out, when you come to sell the property, you could be liable to CGT on any profit from the sale.

Last note: Remember that there is a new 30-day rule for submitting a notification of profits on a sale of a property and the payment of the tax due.

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