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When you sell a property, upon selling you must usually pay Capital Gains Tax on that property. However, Private Residence Relief (PRR) acts as a relief from this tax on your home residence and it is applied to the property automatically once it has been sold.
Capital Gains Tax is paid on any gain in value made on a property when it is sold, which can include:
- Any part of a property which has been used as your main residence but was rented out for a period of time
- Any kind of residential or commercial dwelling, be it a house, an apartment, a lodge or a static caravan which was not used exclusively for living purposes as your main home
- Any part of a property’s exterior land which was part of your home, be it a garden or unused land, but also used for non-home residence purposes
Who Is Eligible For PRR?
If you want to obtain the full relief available on your home sales tax, then the property which you are selling has to have been your main residence, hence the ‘Private Residence’ label this relief has. You might also find you qualify for the relief when you are selling a property that has been provided to a close relative who is a dependent. To be eligible, you have to own either the leasehold or the freehold of the property in question. It has to have been occupied as a main, habitable dwelling or your own home.
If the property you are selling is classed as a second home, a holiday home, or even a property that you have purchased but have been renting out to a tenant since its purchase (a buy-to-let), then it is likely that you will be liable to pay the appropriate amount of CGT on the gain from the property.
However, you will only pay tax on the pro rata amount according to the percentage of time it was rented out not the period that you lived in the property as your main home. You will be entitled to some relief if you have at one point lived in the property as your primary residence. If you have bought the house or apartment in order to make a profit, an investment property, then you will not be entitled to this PRR tax relief.
PRR only applies to residential properties and so, clearly, any property used exclusively for commercial purposes is not eligible for this scheme. The building should be under 1.25 acres extending to the gardens and any smaller outbuildings on the property, but exceptions may be made for larger grounds if they are considered within the property limit.
How To Claim PRR Principal Private Residence Relief?
The relief itself is automatic and you do not have to claim the CGT exemption. However, there are certain conditions which have to be met in order to qualify for the full amount of relief available on your home’s sales tax. If you meet all of the following, you will be able to confidently claim PRR:
- The property has been your main dwelling throughout the whole ownership
- You have always lived there without any absence, with the exception of living for a period in a job-related dwelling
- No part of the property in question has been used exclusively for business purposes throughout the ownership
- The grounds of the property are not bigger than the area which has been permitted
If you are a non-resident of the UK selling a property not qualifying for CGT exemption, then as of 2015 you have to declare a CGT return with 30 days this fact, and you may have to pay Capital Gains Tax, the finer details can be viewed here. For UK residents, this same rule applies since 6 April 2020.
How Is PRR Calculated?
The amount of home sales tax relief that you are entitled to with PRR to depends on a number of factors as outlined above, but largely depends on how long you have lived in the property. Full relief will be applied for every year you have been a resident in the property as your principal dwelling plus an additional nine months after leaving the property.
Let us take a look at an example of how the Private Residence Relief is calculated.
If you have bought a property for a sum of £500,000 and then in six years time you decide to sell the property and achieve a selling price of £700,000, making taxable gain of £200,000, the time you live there then has to be calculated. If you used the property as your main residence for 24 months before you rented it to a tenant, then you can add on the 9 months you are granted after you’ve moved out then that is 33 months in total out of 72 months.
That works out at 46% of the time the property was occupied by you, so that 46% of gain equates to £91,667 which you are not having to pay any CGT on. The rest, £108,333 which equates to 54%, will not be covered by the relief offered with Private Residence Relief, so that gain then becomes chargeable.
There is a handy calculator here on the government website so you can work out exactly how much you should be paying.
Expert Principal Private Residence Relief Claims Guidance
If you are thinking of selling your property that has been part lived in and part rented out or have disposed of it recently, then it is imperative that you get all of your paperwork in hand when calculating the taxes owed on it, if any, from the sale.
We are tax experts for property sales, and we have already handled many claims for Principal Private Residence Relief so our clients are not paying any more than they have to.
We can provide high-quality guidance and advice when it comes to both CGT and PRR, so you know you are in safe hands with our tax specialists.
If you have any questions about the issues raised in this article, we at Key Business Consultants can help. Get in touch with us today or call us directly on 020 3728 2848.
