In this article we look at principle private residence relief, what it is and how it is calculated
The sale of land and buildings in the UK is typically subject to Capital Gains Tax (‘CGT’). CGT is due on the chargeable gains that arise on the disposal of an asset (property in this case). The CGT rate itself is 10% for gains that fall under a taxpayer’s basic rate band and 20% for any gains that exceeds that band. Where the property is residential, the CGT rates increase by 8%, making the charge 18% and 28% respectively. Given the housing market at the moment, gains on the disposal of property can be significant. Yet despite this, many (if not most) do not pay CGT on the sale of their home. Why? Enter: principle private residence relief.
Before we go into the calculations, first let’s lay the foundations.
What is a Principle Private Residence?
In very simple terms, your principle private residence is a house that you live in as your only or “main” residence. It will also include any land accompanied with the house that is within an area of half a hectare (roughly 1.2 acres). The legislation doesn’t use the term “house”, but rather a ‘dwelling house’. Unfortunately, ‘dwelling’ is not defined in the legislation so we instead we look to its ordinary dictionary meaning and case law.
We could write an entirely separate article on the meaning of dwelling house, so to keep it simple a dwelling house is ”a structure that is capable of being used a place to live with a sufficient degree of permanence”. It can comprise of more than one building even where the buildings are not attached to each other. In most cases, it is obvious that an individual’s home is a dwelling house. Where it is not obvious, specialist advice should be sought.
You may have picked up on the term “main” residence. It is, of course, possible for an individual to own multiple homes. It is not possible to have more than one principle private residence relief., therefore an election can be made to choose which property should be classified as their main residence for that given period. It should be noted that married couples or those in a civil partnership cannot elect to have different main residences.
There is a significant body of case law on what constitutes a person’s main residence, most of which agree that it is the quality of occupation rather than the duration – on balance would a third party observer draw the conclusion that the property was a person’s main residence.
CGT on the sale of property
To calculate the gain of a property, allowable costs are reduced from the proceeds of the sale. Allowable costs includes capital expenditure, professional fees, stamp duty etc. The figure remaining is known as the chargeable gain, from which a further £12,300 annual exemption can be deducted from total gains in the tax year to get to the taxable gain. It is the taxable gain to which the respective CGT rates are applied (18% and 28%).
Imagine Andréa, a higher rate taxpayer, acquired property for £500,000. Some years later she sells the property and the taxable gain after the allowable costs and annual exemption amounts to £150,000. Assume that she never occupied the property as her principle private residence. As she is in the higher rate band, CGT is charged at 28% on the taxable gain which equates to £42,000 liabilities – a fairly large sum.
Next, we’ll demonstrate how the CGT due changes if the property was Andréa’s PPR.
How principle private residence relief works
Where the property disposed of is an individual’s Principle private residence relief, the rules change. No gain on the disposal of a principle private residence is considered as a chargeable gain and as such there can be no CGT. Taking Andréa’s example above, imagine that instead she lived in the property as her PPR for the entire period of ownership. In this instance, the gain is not chargeable and therefore there is no CGT.
Principle private residence relief works on a time apportionment basis. What this means is that the relief is only available for periods of ownership where the property is habitually lived in. Interestingly, the final nine months of a property that has at any point been one’s Principle private residence relief always qualifies for the relief.
You might wonder then, what if I go on holiday for a month (lucky)? Does that month not qualify for principle private residence relief? This is known as a period of absence and would still qualify for the relief. There are many situations where an induvial might have to spend time away from their home. The legislation therefore allows for qualifying periods of absence where there has been occupation before and after the period of absence. These periods are:
- absences, for whatever reason, not totalling more than three years. For example, you can have as many holidays as you like as long as the combined days of the holidays does not exceed three years
- absences during which you’re in employment and all your duties are carried on outside the UK
- absences not totalling more than four years which arise because your place of work prevents you from living at home or your employer requires you to work away from your home in order to do your job effectively.
Reverting back to Andréa, imagine that she owned the property for eight years. Let’s assume that this time she no longer occupies the house in the final two years and instead rents it out. The apportionment works as follows:
- The first six years (72 months) qualify for principle private residence relief as she lived there habitually. The final nine months, as they always do, also qualifies for principle private residence relief That totals to 81 qualifying months.
- The months where the property is let, except the final nine months, does not qualify as she has not reoccupied the property after the period of absence.
Principle private residence relief can be straight forward to calculate where the property has been occupied throughout the period of ownership. Where there is a period of absence, the adjoining land extends beyond 0.5 hectare, or there are multiple buildings the calculation can be more complicated, and advice should be sought.
As a reminder, any chargeable gain on the disposal of UK property should be reported (and the tax paid) to HMRC within 60 days of completion.
If you have any questions about principle private residence relief or any other tax matter drop us a message