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There is a special Capital Gains Tax (CGT) relief when you sell your home. This is called ‘Principal Private Residence Relief’ (PPRR). If you have always lived in the property and have no other private residence then the position is usually straightforward and you have nothing to worry about. But, it is important to be very clear on the facts and to understand the tax law.

The main point to consider is how the house was used. Was it your main home? Has it been let out or left empty? Have you owned another property, or possibly rented one at the same time as you owned the one that has been sold?

If you have never lived in the house as your main home, then you are not entitled to PPRR, but if you have lived in it as your main home for some of the time during which you owned it, then you should be entitled to some PPRR.

Quality of occupation and intention matter here more than simply length of time. A relatively short period actually living in a flat as a home, with the initial intention to occupy the flat for the long-term, can establish the right to some PPRR. If your plans change, and you leave the flat after a few months you should still be eligible for PPRR, but long term ownership of a house which has been let out, but not occupied at any stage as your private residence, would not give any right to PPRR.

    When a property qualifies as a principal private residence for CGT, then the following also apply:

  1. You are treated as living there – and so entitled to private residence relief – during the last period of ownership even if you are not actually living there. From 6 April 2014, this covers the last 18 months of ownership
  2. You can be away from your principal private residence for work (4 years in UK; without restriction if abroad) or any other reason (up to 3 years) and still qualify for these periods, so long as you re-occupy the property as your principal private residence after the absence. This requirement to re-occupy the property is relaxed in respect of absences resulting from work where the terms of employment, prevent you from reoccupying the property
  3. You can get a ‘letting relief’ if you let your property as residential accommodation. Letting relief applies where a house that has been your main private residence is let as residential accommodation. The letting can be before or after the time you occupy it as your principal private residence. Normally CGT would be payable when you sell or give away a property which is rented out. But this special relief means that any capital gain which would be charged to tax for the period when the house is let out, is reduced by up to £40,000. (The calculation is complicated and you should take advice if this applies to you)
  4. If there is still a capital gain after all these aspects have been taken into account (viz permitted time away, letting relief, last 18 months, private residence relief for time of actual occupation), then the annual capital gains tax exemption (£11,100 in the 2015/16 tax year) may cover what is left

Possible complications when Applying PPRR

    Unfortunately PPRR can become very complex. Possible complications include: For more Tax Questions Answered click the question mark

  • The treatment of annexes and outbuildings – are these substantial enough to be treated as separate buildings and so be outside the principal private residence relief available on the main property?
  • Buildings which are divided into flats, or which share common facilities
  • The size of gardens / grounds – extensive grounds, or a small field/paddock attached to the property, may not be included within principle private residence relief
  • The motivation for sale – there are anti-avoidance rules which apply if someone buys a property in order to make a gain – i.e. their intention was property speculation
  • Building your own home and selling it could be regarded as a trade and so taxable as a business, particularly if this is done more than once, or if you earn your living as a builder
  • The timing of the sale of house and grounds can all have a substantial impact. Selling house and grounds separately could affect the principal private residence relief available
  • Ownership of two properties, or even renting a second property as a main residence, means that you have two residences. In such cases you should make a tax election within 2 years of acquiring the second property. If you do not, HMRC will decide which of the two is your main residence
  • man a Pushing a bolder up a hill with the capital gains tax cartoon image

    For More on Capital Gains Tax Please click on the boulder

  • Owning a property which is someone else’s private residence, or living in a property owned by someone else. This can happen where relatives try to ‘help out’. (E.g. A father buys a half-share in his son’s house to help him get a mortgage. The father is not living in the house, so he is not entitled to principal private residence relief on the part he owns. If he later gives (or sells) his share to the nephew there could be a CGT liability)
  • Care is needed on separation or divorce. When one person moves out of the family home this can put at risk the CGT private residence relief on their share of the property. The position is complex and it would be best to take advice from an accountant

And finally, please remember that if your circumstances are complex, it is best to take advice, as mistakes with Capital Gains Tax can be very expensive indeed!


 

Image of David Jones Shrewsbury Accountant and Founder of Morgan Jones(Note: my thanks go to TaxAid a charity that advises people on low incomes whose problems cannot be resolved with HMRC, for information used in compiling this article.)

If any of you would like more detailed information on any aspect of UK Tax Returns, send me an e-mail and I’ll be pleased to advise further.

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