What is Private Residence Relief and its impact on Capital Gains Tax? | DS Burge & Co (2024)

If you are selling a property in the UK that isn’t your primary residence, you will normally be required to pay Capital Gains Tax (CGT) on any financial gains you make from the sale. Capital gains tax on residential property may be 18% or 28% of the gain, not the total sale price.

HMRC provides detailed information about the taxation rules regarding selling your home. However, if your sale meets certain conditions, you may be entitled to Private Residence Relief (PRR).

What is PRR, who is eligible, and how is it calculated?

How the Private Residence Relief works

PPR applies to the sale (or ‘disposal’) of a ‘dwelling house’ that has been or still is an individual’s only or principal residence. What constitutes a ‘dwelling house’ has not been defined by legislation. Instead, a body of case law built up over decades provides guidance.

In most cases, a dwelling house will be the entire building in which an individual lives. However, this designation may also include the main building and any relevant buildings that adjoin the main building. This might consist of a workshop, outside study or a garage used as part of the overall household.

As well as the building itself, the gardens and grounds that fall within a permitted area will also qualify for the relief. The permitted area is typically defined as less than 5,000 square metres. However, HMRC may still permit a larger area to qualify, provided that this area is essential for the ‘reasonable enjoyment’ of the property.

If any part of the property is used exclusively for business purposes, then this part of any gain made on the sale overall will not qualify for relief. A room in the house used for occasional remote working will not be classed as exclusively for business purposes.

When you’re entitled to full relief

You will not be required to pay Capital Gains Tax when you sell your home if you can satisfy all of the criteria below:

• You are selling your only home.
• You have lived in the property as your main home for all the time you’ve owned it.
• You have not used a part of your home exclusively for business purposes.
• The grounds and all the buildings have a total size of less than 5,000 square metres.
• The property wasn’t purchased solely to make a gain.

If you meet all of these criteria, then Private Residence Relief will be awarded automatically, and there will be no tax to pay. If one or more of them do not apply, you may be liable for partial CGT.

Selling your family home

In most instances, when you’re selling your family home, it won’t be liable for Capital Gains Tax, and most homeowners will not encounter it. It becomes more complicated if part of your property is used exclusively for business purposes or if you have more than one property.

Where you’re entitled to partial relief

If you do not meet all of the conditions for full PRR, you may still be entitled to partial relief. You can discover if you qualify in any way for partial Private Residence Relief by filling out the appropriate CGT tax return summary pages. HMRC will then review your form and inform you if you still qualify for partial Private Residence Relief.

Does PRR apply when selling your second home?

Only one residence can qualify automatically for PRR at any point in time. Husbands and wives (or civil partners) who live together can only have one qualifying residence. A second home will, therefore, not usually qualify for any PRR.

What if you’ve made a loss selling your property?

Capital Gains Tax is charged on your profit on the sale, not the overall sale price. Therefore, if you’ve made a loss rather than a gain when you sold your property, you will not be liable for CGT.

What is the 36-month rule?

The 36-month rule refers to the exemption period before the sale of the property. This applies to all property sales that were completed before April 2020. The 36-month rule has evolved to include a shorter exemption period for most property sales, updated as of 12 May 2023. Previously this was 36 months, but this has been amended, and for most property sales, it is now considerably less.

Tax is paid on the ‘chargeable gain’ on your property sale. This is the gain minus any Private Residence Relief to which you are entitled.

You will get full relief for:

• The years you lived in the home.
• The last nine months that you owned the house even if you were not living there at the time.

If the property was sold between 6 April 2014 and 6 April 2020, relief is applied for the last 18 months you owned it. If the property was sold after 6 April 2020, relief is applied for the last 9 months. If you only own a single home and you’re disabled, in long-term residential care or the property was sold before the 6 April 2014, full relief will be applied for the last 36 months.

How to calculate Private Residence Relief

How Private Residence Relief is calculated has changed. The amount of relief you may receive will differ depending on whether the sale was completed before April 2020.

How to calculate private residence relief pre-April 2020

Before April 2020, there was an 18-month exemption period which would be added to the time period in which you lived in the property as your primary residence. For instance, if you owned a home for ten years and lived in it for four years, you will receive PRR for five and half years of your ownership. In other words, only 45% of your gain would be liable for CGT

How to calculate private residence relief in 2023 and 2024

The exemption period was reduced from 18 to 9 months from April 2022. This exemption period is now 9 months for property sales that were completed on or after April 2022.

Who qualifies for private residence relief?

From April 2015, to qualify for PRR, the person selling the property has to be resident for tax purposes in the same country as the property for the tax year.

Capital Gains Tax for non-residents on UK residential property

Non-UK residents who are disposing of UK residential property will not receive PRR unless they have spent at least 90 midnights in the property.

Other considerations for private residence relief

• Dwelling house – a house/flat/houseboat or fixed caravan which is your home.
• Only / main residence – the dwelling house has been your only or main residence throughout your period of ownership.
• Period of ownership – the length of time you have owned the property from purchase to sale. This will provide the basis on which any Private Residence Relief will be worked out.
• Job-related accommodation – property provided to a person (and their spouse) for work where you are required to live to carry out your duties. If you have to live in job-related accommodation and own a primary residence elsewhere, this will be considered when determining Private Residence Relief.
• Garden or grounds – there is no statutory definition of garden or grounds, with the word grounds usually inferring a larger area than a garden. HMRC provides guidance based on the following dictionary definition:
  • Garden: a piece of ground, usually partly grassed and adjoining a private house, used for growing flowers, fruit or vegetables and as a place of recreation.
  • Grounds: enclosed land surrounding or attached to a dwelling house or other building serving chiefly for ornament or recreation.
  • Land which does not form the garden and grounds does not qualify for the relief, even if the total amount of land disposed of with the residence is not more than the permitted area.
• Permitted area – PRR extends to the capital gain attributable to the dwelling house or part of the dwelling house that has been enjoyed as the main residence with associated land up to the permitted area. The ‘permitted area’ is defined in the legislation as 0.5 of a hectare (i.e. 1.23 acres), including the land occupied by the dwelling house. Therefore, where the garden and grounds are not more than 0.5 of a hectare, as long as the conditions for the relief are met, the whole area automatically qualifies for relief.

Can you claim both Private Residence Relief and Letting Relief?

It is possible to claim both Private Residence Relief and Letting Relief in some circ*mstances.

If you only let out part of your home, you’ll need to work out what proportion of your home you lived in, as you will only get Private Residence Relief on this proportion of your gain.

For instance, if you rent a bedroom to a tenant, that may amount to 10% of your home. When you sell your home, you make a chargeable gain of £50,000. As 10% of your home was let to a tenant, you will receive PRR on 90% of the total gain. You will also be able to claim Letting Relief on the remaining 10%.

In other words, by adding together PRR and Letting Relief, you would not be liable to any CGT.

Professional Capital Gains Tax advice you can trust

The experienced team at DS Burge & Co can ensure you receive any Private Residence Relief to which you are entitled. We offer a fully bespoke Capital Gains Tax advice service and have decades of experience helping our clients negotiate the complexities of CGT.