Are you making the most of principal private residence relief (PPR)?
It is often assumed that the sale of your main home is free of capital gains tax (CGT). However, a closer examination reveals that principal private residence relief is complicated and there are pitfalls for the unwary.
What is principal private residence relief?
In the most straightforward case, this is the tax relief available where an individual sells their only or main home. As long as this has been the case for the entire period of ownership, PPR relief exempts the capital gain so there is no CGT due. To qualify, you need to show that the property has been your only home, which means there must be a degree of permanence. For the majority, this will be the position but there are circumstances where periods of “deemed occupation” need to be considered and where this valuable relief can be restricted.
What is deemed occupation?
Very broadly, these are periods of absence treated as actual occupation, where a property has been occupied as a main residence before the period, including:
- The last nine months of ownership
- Any period when working wholly overseas
- Up to four years when working away from home
- Up to three years for any reason.
Care is needed with the last three periods listed, as they only count if the property is reoccupied as a main residence after the period.
Any capital gain arising on disposal will therefore still be exempt from tax where the property has actually been your main home and there are periods of deemed occupation.
What if I have more than one residence?
As a general rule, an individual will only have one main residence at any one time. Where there are two residences, identifying which is the main residence is a question of fact. It is usually the property most frequently occupied. However, it is possible to make a main residence election which would override this. This would be beneficial where one property triggers the greater capital gain on disposal.
The election must be made within two years of the date of the acquisition of the second property or change of residence.
When can PPR relief be restricted?
- Where the property is let during the ownership period.
- If the grounds exceed 1/2 hectare, although this may be allowed in some circumstances.
- If a second residence is owned.
- Where there is exclusive business use of the property.
- Where property trading activity is suspected.
Where only partial PPR relief is available, the capital gain is time-apportioned between periods which qualify for principal private residence relief and those that do not.
Are any other reliefs available?
Lettings relief of £40,000 can be claimed but only if you share occupancy with a tenant.
Filing and paying tax
With the highest rate of CGT dropping to 24% (from 28%) for disposals of residential property on or after 6 April 2024, you may be tempted to sell. Further, the change of government could see the sale of residential property as an easy target to raise revenue and increase the CGT rate. If you do decide to sell, you will have just 60 days to report and pay CGT to HMRC.
How we can help
We can advise on how to minimise your tax bill on the sale of your residential property and ensure that the most tax-efficient reliefs are claimed. We can also assist you with preparing any returns due and how to settle the tax by the required deadline.
Please get in touch with Teresa Tone or any member of our private client team.