You can claim tax relief on the disposal of your only or main residence (also called your principle private residence or PPR) and as a result not pay any Capital Gains Tax (CGT). This is called Private Residence Relief (PRR).
The exemptions cover total grounds, including the house of up to half a hectare. The total grounds can exceed half a hectare if the house is large enough to warrant it, but if not, the gain on the excess grounds is taxable.
Capital Gains Tax on Residence Summary
- If a property was your PPR for the entire time of ownership and you don’t own any other residences, then you will qualify for PRR.
- If the disposal qualifies for PRR, disclosure on your personal tax return is not required.
- PRR is only available to individuals and not to companies or other entities.
- You need to occupy the whole residence throughout the whole period of ownership to qualify for the relief, but some absences are allowed (please see below).
- If you owned more than one property, you can elect which one will be your main residence (see below).
- You can change your main residence election to take advantage of the tax relief.
- You may be able to claim letting relief on the capital gain attributable to the letting period if the property was occupied as an only or main residence at some point during ownership.
- No PRR is available on the part of your residence used exclusively for business purposes, so make sure that the letting is for non-exclusive use.
- If you made a loss, which if it were a profit would have qualified for PRR, that loss is not allowable and must be ignored.
When does a property qualify as a residence?
A property will qualify as a residence if the following apply:
- You have owned the property;
- You have physically lived in it;
- It has been your only or main home at some stage;
- There is a sufficient degree of permanence, continuity or expectation of continuity;
- There is evidence that you have lived in it, e.g. mains services are all connected, utilities have been used and you made it your home (see below);
- The house is habitable;
- You stayed in the property for a reasonable amount of time; there’s no specified minimum period, but the longer the better; sporadic and occasional visits and council tax exemptions will count against you.
- It was your intention to occupy the property as your main residence and you have evidence to prove this. Your intention is very important; the onus is on you to prove your intention and then to provide evidence to show that it was in fact your main residence.
- The house was NOT put on the market to resell or to let out before or soon after you moved in.
- You did not declare to the HMRC that your accommodation is temporary, as this will definitely not count as a home.
- Your evidence is consistent with the facts.
Things you can do to make a property your home
- Keep physical evidence that can confirm the property was your main residence at some stage, such as bills (light, heating, and telephone), council tax, DVLA records, postal address for HMRC/bank/utilities, etc.
- Have parties at the house;
- Take photos and post them on Facebook;
- Have an Amazon account showing it as the delivery address;
- Shop locally and keep the receipts;
- Keep clothes and personal effects there;
- Have furniture, such as a TV (with a TV licence);
- Decorate the property.
Election to confirm main residence
If you owned more than one property, you can elect one as your main residence.
- You have two years from the date you made your last property your main residence to make the election.
- If you don’t make the election, the HMRC will do so and this might be to your disadvantage.
- Your election must be valid though, i.e. your property has to be a ‘residence’.
- If you make a valid election, then the HMRC cannot challenge this afterwards.
- You can change your main residence election (within two years of the change) to take advantage of the tax relief. There’s no limit on how many times you can do this.
- Married couples or civil partnerships can only have one main residence between them, so an election has to be given by both. Examples: A&B are married (or in civil partnership):
- A owns two residences – a joint election is meaningless, because B will have no gain on disposal of either one of the two residences.
- A&B own one residence jointly, and A owns another – a joint election is necessary, otherwise it deprives B of residence status for their half of the first residence.
- A&B own two residences jointly – same as above, a joint election is necessary, otherwise it deprives B of their residence status for their half of both residences.
Allowed periods of absence, i.e. deemed occupation
One of the rules for claiming PRR is that you must have occupied the residence throughout the whole period of ownership. But some absences are allowed and will be disregarded if at any time during ownership the property has been your main residence.
The last 18 months (9 months from April 2020) of ownership is always treated as a period of occupation, even if you also had another house which was your PPR during this period.
The following absences are allowed, but only if you used the property as your only or main residence before and after the absence:
- Any period (or periods taken together) of absence, for any reason, up to three years.
- Any periods during which you were required by your employment to live abroad.
- Any period (or periods taken together) up to four years during which you were required to live elsewhere due to your work (i.e. both employed and self-employed taxpayers).
- Any periods during which you were required to live in job-related accommodation, but not if you or your spouse have a material interest in the company or partnership.
- If the following applies you don’t have to use your property as your only or main residence after a period of absence:
- Where you or your spouse are prevented from resuming residence as a consequence of the situation of your/their place of work or due to a condition imposed on you/them by the terms of your/their employment requiring you/them to reside elsewhere to secure the effective performance of your/their duties.
Please note that to all intents and purposes the letting exemption is being scrapped from April 2020 (the landlord needs to live in the property at the same time as the tenant).
If the period of absence is a not permitted as outlined above, then a further relief is available if the property has qualified for PRR at some point during ownership. Letting relief is available regardless of whether the letting period is before or after you occupied your property. The relief is the lower of:
- The gain that relates to the period of letting, i.e. the period of letting/the period of ownership;
- Any gain already exempt due to PRR; and
The £40,000 cap is per owner and so if the property is owned by a married couple or a civil partnership, there is a potential £80,000 letting relief. Letting relief can neither turn a gain into an allowable loss, nor increase an existing loss.
Calculation of PRR if you have disallowed periods of absence
If you used your property as your only/main residence for only a part of the period you owned it, the portion of the time you did not live in it (or that does not qualify as deemed occupation) will not qualify for PRR. In such a case PRR is calculated as follows:
Total gain x (Period of occupation / Total Period of ownership)