What is Private Residence Relief, its Compliance, & How to Claim it?

Capital gains tax (CGT) on our home sometimes feels unjust. But the good news is that usually Private residence relief covers most homeowners completely. It is one of the most effective tax reliefs in the UK, and it can completely or partially exempt the CGT made on your property sale. The concept is clear, but it has some rules and considerations that Estate Agent Ilford will cover in this guide: 

What Does Private Residence Relief (PRR) Mean?

The Private Residence Relief provides individuals with relief from paying Capital Gains tax when they sell their property. PRR applies when the property that you are disposing of is your main residence or only residence during the period of ownership. Generally, the CGT is 18% to 24% of the profit gains from the sale of property. 

To become eligible for PRR, you must be disposing of a dwelling house that has been your only or main residence. At the same time, the UK legislation doesn’t precisely define a dwelling house; in most cases, the entire living space, including related structures like garages, gardens, outbuildings, or self-contained units. 

Eligibility of Private Residence Relief

You don’t pay CGT when you dispose of your property if all the following conditions are met:

1. The property you are selling is your only residence and has been your residence during your ownership.
2. You don’t have to let it partially except lodgers.
3. You are not using a part of your property for business purposes (an occasional room as an office does not count as business use).
4. The property is not bought solely for financial gains.
5. The grounds include all buildings that are less than 5,000 square meters in total (approximately over an acre).

If your property fulfilled all the conditions, then the PRR will automatically apply, and you will have no tax to pay. The taxpayer must satisfy the HMRC that they lived in the property before selling. 

Do You Qualify for PRR? Run Through The Checklist

Before you sell the property, make sure that your home qualifies for Private residence relief. Here is the checklist you can follow 

Condition of Selling Property	Yes/No	If not? What Happens
The property is in the UK	Yes No	The PRR does not apply
You Owned the Property	Yes No	The PRR does not apply
The property remained your main residence at some point	Yes No	No Relief from PRR, full CGT applies
You lived there, actually (Have proofs like bills, utilities)	Yes No	HMRC can challenge claims, and you will provide proof when applicable
The property was a sole residence, or you nominated it with HMRC	Yes No	PRR does not apply fully, and CGT will apply to part or all gains
The Property was used primarily for living, not business	Yes No	Partial PRR may apply
Letting was partial (lodger)	Yes No	PRR may be reduced, and a major portion of CGT will be payable from gains.
Grounds are under 5,000 sqm (approximately one acre)	Yes No	CGT will apply on excess land available
The property was intended to live, not for profit gains	Yes No	PRR may not applies and full CGT will be subject to pay on gains

Who Still Qualifies: Periods of Absence?

Various periods of absence stills qualifies as periods of actual occupation, which includes:

Absences That Don’t Exceed Three Years

A period of absence of up to three years can be treated as a period of residence. To qualify for this treatment, there must be a significant period of residence before the period of absence and a period of occupation after the period of absence. 

For example:

John purchased a home on 15 July 2010, and he lived in it until 31 April 2013. Then he went for a trip or moved out for just over four years, returning in August 2017. And after returning, he again lived in the property for four years until 2021, when the house was sold.  It means:

• The first three years are occupied as the only main residence.
• The next three years, from 1st April 2013 to 31 March 2016, are counted as the period of absence.
• The additional year of absence will have no relief on CGT from gains, because he had already used the permitted period of absence.
• Again, the property is treated as the main residence for three consecutive years.

Absence Due To Employment Outside The UK

When UK residents move out of the UK due to employment, any period during the job is treated as a period of residence for Private residence relief. For the qualifying PRR, the property must be the only and main residence before going abroad. There is no limit on absence in this case when individuals are working outside the UK.

Absence Due To Your Employment 

If an individual is prevented from occupying because of conditions of their employment, sometimes due to short-term Corporate Relocation.  This timeline will be treated as the period of residence following that individual’s having previously lived in the property before moving out for employment purposes. 

Absence Due To The Spouse Or Civil Partner’s Employment

When an absence is recorded because they live with their spouse or civil partner who is required to work anywhere else. The conditions still apply to qualify for private residence relief, that the property must be the only or main residence of the couple before moving for employment of one partner. This period of employment outside the location will then be treated as the period of residence. 

How Much Relief Can Homeowners Get?

If the property remained your sole residence during your ownership, any capital gains will be fully exempt from CGT.

On the other hand, if the property has not been your main residence throughout the ownership period, the gain will be determined based on: 

• The period during which it was your main residence.
• The final nine months of ownership (which qualify automatically).

For example:

If you owned a house for 10 years and used it as your main residence for 6 years. If you rent out your property for 4 years before selling, you would be entitled to PRR for those 6 years plus 9 months. The remaining period will be chargeable for CGT or subject to letting relief if applicable.  

How to Calculate Private Residence Relief?

The tax legislation presented a formula to calculate the Private residence relief if the owner used the property fully or partially as their main residence during the ownership. 

Calculation of Gain When Partial Relief is Due:

• If part of your property is used exclusively for business purposes, or you rent out a part of your home. 

• If you have not permanently lived in your property, other than applicable periods of absence. The formula to calculate PRR will be:

• If you have more than one home, nominate the one as your primary residence, and then the formula will be:

Private Residence Relief In Special Situations

The Private residence rules are different in special situations when you own more than one property or a gifted property.

If You Own More than One Property / Nomination of Main Residence

If you own multiple properties, you will select which property will be entitled as your main residence for PRR by making a nomination to HMRC. The main residence must be declared within two years of buying a second property. You can write to HMRC to nominate one of your properties as your main residence. The letter includes the address of the home and the signature of the owner. 

The rules are complex about on what basis the property will be nominated as your main residence. It’s advised to seek professional advice in this respect. The professional advice will help you.

• Calculate your potential gains.
• Identify reliefs
• Strategically plan the disposal for tax efficiency. 

Gifting Property

If someone gifts a property to a family member, it will still count as a disposal for CGT implications. The same PRR rules will be applied. If this home was your main residential property throughout the ownership period, PRR may exempt the CGT from gains. 

But in the case of non-residential property, CGT will be charged even if no money is exchanged. 

The 60-Day Rule for Reporting

If the PRR does not fully cover your Capital Gains Tax from the profit, you need to report it to HMRC within 60 days of the completion of the sale. The rule applies to both UK residents and non-UK residents.

Non-compliance with the deadline may lead to an automatic £100 fine and further penalties in case the delays continue. 

Lettings Relief

Letting relief exempts CGT from the gains when you sell or dispose of the property that was your main residence for a period, and you rent it out partially. From April 2020, this relief will apply when the owner lives in shared occupation with their tenants. It can exempt about £40,000 of gain or £80,000, in the case of couples. 

The letting relief will not be applied to the tenancies where the owner has moved out of their residential property.

PRR vs Letting Relief

Here is the quick comparison of Private Residence Relief with Lettings relief:

Common Pitfalls Regarding PRR

Some pitfalls affect the Private Residence Relief and reduce the exempt period for CGT from gains:

1. Occupation Gaps: If homeowners move abroad or to a second home and spend more than the permitted periods of absence may reduce the period of exemption.
2. Late Move-in: If you buy a house and don’t move in immediately, the period before moving in may not qualify.
3. Use Home for Business: Using your home partially exclusively for business can restrict and limit the PRR.
4. Non-Residents: Since 6 April 2020, non-residents can only claim residence relief for periods where they met the conditions of day-count and presence.

Conclusion

The Private Residence Relief is the most valuable tax protection in the UK for homeowners selling their main home. It exempts any capital gains tax from the profit from the sale of the property. The periods of absence, business use, owning multiple properties, and letting management can all affect how much relief you can claim.

The PRR applies automatically when the property has been the only or main residence through the period of ownership. The final 9 months of ownership are always exempt, and you nominate the property as your main residence to HMRC within 2 years of acquiring a second property. The gains and pay must be reported within 60 days of selling the property, and failing to do so may result in an automatic £100 penalty.  

Frequently Asked Questions