When selling your property for a profit, you may have to pay tax on your profitable earnings.
To be exempt from this tax, you can apply for Private Residence Relief (PRR).
However, this relief may only be granted under certain circumstances.
What is private residence relief?
When a homeowner wants to sell their property and gain a profit, they are usually charged Capital Gains Tax (CGT).
To be exempt from Capital Gains Tax or have the overall amount lowered, there is a Private Residence Relief option available.
Remember – this only applies to a home that is owned and occupied by you as your main residence.
Private Residence Relief, in most cases, covers the years that you have been living in the home; as well as 9 months after you have moved out of the premises.
How does private residence relief work?
In order to qualify for full Private Residence Relief, the following requirements must be met:
- The property has been your only or main residence for the entire time that you have owned it
- All of the property has been used as your home
- The size of the property is less than 5000 square metres, including all grounds or infrastructure that may be situated on the land
- The homeowner must pay tax and own the home in the country which he pays tax
If all of the above apply to you, you may be exempt from Capital Gains Tax. If only one or more factors are applicable, you may still apply for partial Private Residence Relief.
Factors to consider before applying for private residence relief
Principal private residence
If you have not lived on your property for the full duration of ownership, you may still apply for Private Residence Relief if your period of absence was due to the following:
- You were receiving care in a hospital, retirement home or any fee-paying institution (up to 36 months)
- You were required to work outside of the country
- Your employer required that you live elsewhere (up to 4 years)
If all of the property was not used as your home, you may not be granted full Private Residence Relief. However, you may be able to claim an exemption for the chargeable gain.
For example, if you used one part of your home as a business, you may still claim for the part of your home that was used as your dwelling house.
The amount charged will be dependent on the size of the space that was used for the business, separately from the home.
Tenants
If you have a tenant on your property, you may apply for Letting Relief.
This is only applicable if shared occupancy between the tenant and owner is observed.
This means that the owner must have resided on the same property at the same time as the tenant.
Property land
You may qualify for Private Residence Relief if your land is less than 5000 square metres.
However, if the area exceeds this, it may not be considered part of the main residence.
If the land is used for business, services, roads or other civil and public reasons; this will not apply to the Private Residence Relief.
If a homeowner seeks to dispose of the land used to occupy the garden only, they may do so under the same conditions.
Civil partners
Legally married couples or civil partners are entitled to only one residence between the two.
If you both owned properties before getting married, you will need to nominate one main residence.
This decision is crucial as it can affect the status of Private Residence Relief and Capital Gains Tax.
Be sure to discuss this carefully with your spouse or civil partner before making a decision.
Job-related accommodation
If your job provides you with housing, and you own a house that you plan to live in as your primary residence, you can claim the house you own as your primary residence.
This can be done even if you never actually live there.
You may be granted tax relief on any gains you make from selling the house.
However, if you change your mind and don’t plan to live in the house you own, you can no longer claim it as your primary residence.
This rule also applies if you’re self-employed and the housing is provided by someone else as part of your job.
Examples
To help you understand the concept, here are 2 useful examples:
Example 1
Pam wants to dispose of her dwelling house, which she has owned and lived in for 15 years.
She wants to apply for Private Residence Relief and avoid paying Capital Gains Tax.
However, Pam has a small space at the residence which she uses to run her hairdressing business.
Upon applying for full residential relief, she was denied. Only a partial relief can be granted, which excludes the size of the part of the home used for business.
Example 2
Liam wants to apply for Private Residence Relief upon selling his guest house.
He was denied relief, because the home was not his only or main residence.
Liam was also denied Lettings Relief because he did not share occupancy with his guests at the house.
Can I still receive private residence relief if I make a loss?
If a loss is made when selling a property, the homeowner may not receive full relief, even if they have met all requirements.
You may not use any loss from that sale to reduce your tax on other income or gains.
A residence relief may only be granted on a capital gain.
Non-UK and UK residential property
If you are a UK resident who owns a property abroad and it is your only or main residence, you can claim Private Residence Relief.
But, if the property is located in a country where you are not a tax resident, there are special rules that apply:
- For tax purposes, a property is only considered your residence if you have been there for at least 90 days during the tax year
- If you are a UK resident and you own a property outside the UK, the 90-day test only applies to tax years from 2015-2016 onwards
- If you own a property in the UK but you are not a UK resident, any periods of ownership before April 6, 2015, are not considered, unless you choose to make an election on the retrospective basis.
Final thoughts
In conclusion, if you’re planning to sell your property and want to avoid paying Capital Gains Tax, make sure you meet the eligibility criteria.
It’s important to consider all relevant factors and seek advice from expert accountants if necessary to maximise your property profits.
If you need more information, feel free to contact us anytime!
