Principal private residence relief
Written by Ray Coman
Each taxpayer, or each married couple, is entitled to dispose of their home, or principal private residence (PPR), without liability to capital gains tax (CGT.)
The amount exempt from CGT is the proportion of the gain relating to the period in which the property was a PPR.
A dwelling for PPR purposes includes a house, buildings attached or close to it and grounds and up to half a hectare. In exceptional cases a larger area of grounds may be considered part of a dwelling.
Currently, there is no minimum period of occupation required to prove that a residence was a person's PPR. However, evidence to substantiate that a property was occupied by a person may be insubstantial where the period of occupation is comparatively fleeting. In practice, a record of change in address on the electoral register, HMRC correspondence and utility bills are useful in demonstrating occupation of a property.
Deemed periods of occupation
Principal private residence relief is based on the number of months in which a property is occupied by its owner as a proportion of the total number of months in which that property is owned. However, in calculating the PPR relief, certain deemed periods of occupation can be taken into account. The deemed periods of occupation only apply provided that there is an actual period of occupation at some point before and after the period of absence. These include:
- Any periods of absence (for whatever reason) that do not in total amount to more than three years; and
- Any period, no matter how long, where the owner (or the spouse of the owner) was employed abroad; and
- Any period or periods of absence totalling more than four years where the owner (or the owner's spouse) was working elsewhere in the UK, or had to live elsewhere for work reasons.
- There is a deemed period of occupation where an individual cannot move into a dwelling house immediately, due to building works, provided the work is completed within 12 months of the owner acquiring the property.
- Any deemed period of absence, only applies where the owner does not have another residence that qualified for PPR during the period of absence.
A final period of ownership is a deemed period of occupation, regardless of whether the property is occupied at all during the period, and even if another property also qualifies as a principal private residence at the time. The final period is currently 18 months (and was 36 months up to 5 April 2014.)
Principal private residence relief will apply for a deemed period of absence regardless of whether the property let or is left vacant. However, it is only possible to have one PPR at any time. Therefore, a deemed period will typically only apply where the owner has rented while away.
If the period of absence is a not a deemed period of occupation, then a further relief is available where a property is let that has been the owner's home. Letting relief is available regardless of whether the letting period is before or after the occupation of the property by its owner. The relief is the lower of:
- The gain attributed to the period that the property was let, i.e. taking the dominator as period of ownership and nominator as period in which it was let;
- Any gain already exempt due to principal private residence relief; and
The £40,000 cap is per owner, and so if the property is owned by a husband and wife there is a potential £80,000 letting relief. Letting relief can neither turn a gain into an allowable loss, nor increase an existing loss.
Principal private residence relief can significantly reduce capital gains tax. In an increasingly mobile world, the relief offers a key opportunity to lower liability to tax. Please consult Coman & Co for further information.