Selling your residence? Don’t forget to save on tax!
- TBA
- Sep 4, 2024
- 5 min read
Let’s address some common tax issues. In the UK, if you sell a property and make a capital gain, you need to pay Capital Gains Tax (CGT). However, if this property is your only or main residence, you can use Private Residence Relief (PRR) to reduce this tax liability.
1. What qualifies as a main residence?
We have a very typical case worth discussing.
In 2012, a client of ours bought a property in the UK and lived there until 2020. Then, his employer seconded him to an office in China. During his four years in China, he lived in a company-provided rental property.
This year, he returned to the UK and wanted to sell his original property to buy a new one. The question arose: since he hadn’t lived in this property for four years, could it still be considered his ‘main residence’? Could he still apply for Private Residence Relief when selling this property?
2. What is Private Residence Relief?
Private Residence Relief (PRR) is a type of Capital Gains Tax relief that applies to the sale (or disposal) of a property that has been your only or main residence. If you have a property in the UK and it is your main home, you can consider using PRR to reduce the taxable gain when you sell it.
A property is considered your only or main residence if it’s your family address, and you’ve lived there for a long time. During the time you lived there, you considered it your ‘home’ and never rented it out.
Usually, a residence is a building where an individual lives. Sometimes, it can include other buildings associated with the main house, such as workshops, outdoor studies, or garages that are part of the household.
Additionally, gardens and grounds within a permitted area, usually defined as less than 5,000 square meters, may also qualify for relief. In past cases, HMRC has allowed larger areas, provided they serve the functional enjoyment of the property.
If the property is partly or wholly used for business purposes (e.g., office, surgery, workshop, hotel), your relief will be restricted and apportioned. Remote work arrangements where employees work from home a few days a week are not classified as business use. Moreover, if the property is co-owned or rented out, apportionment may be necessary, and you might owe Capital Gains Tax on part of the gain.
3. When do you qualify for PRR?
If you meet all the following conditions, you can get full CGT relief on the sale of your house:
The property is your only home.
You have used it as your main residence since you acquired it.
You haven’t used part of it exclusively for business purposes.
The total area, including grounds and buildings, is less than 5,000 square meters.
You didn’t buy the property just to make a gain.
Remember, if any of these conditions are not met, you might owe some Capital Gains Tax.
4. Complex cases
If you own only one property and can provide necessary evidence that it meets all the criteria, your PRR application will be straightforward. However, the rule allows owners to benefit from relief on an ‘old’ property. This means that if you own multiple properties or plan to develop properties and intend to sell just one ‘main residence’, this property might still qualify for PRR. Therefore, if you own multiple properties, your case will be more complex.
If you own two or more residences, you need to notify HMRC and make an election to designate which property is your main residence for CGT purposes. This must be done within two years of acquiring the property. If you don’t make such a declaration, HMRC will decide based on the facts which property is your main residence.
For example:
Dan owns two properties – one in Brighton and a cottage in London that he inherited 18 months ago from his late aunt.
Dan spends most of his time in the Brighton property, is registered to vote there, and receives all his mail (bank, HMRC, DVLA) at the Brighton address. However, he loves the London cottage and spends weekends there, decorating and setting it up, without renting it out.
Based on these facts, HMRC would likely consider the Brighton property as Dan’s ‘main’ residence. However, Dan can nominate the London cottage as his main residence, provided he does so within two years of acquiring (inheriting) it.
We strongly recommend that owners of multiple properties consult professionals in advance to obtain CGT relief correctly.
5. What if you don’t live in the property for a period of time?
As per our client’s case, if due to special reasons you are not able to live in your ‘main residence’ for a period of time, can it still qualify as the main residence?
For CGT purposes, if you don’t live in the main residence for a period and do not have another new residence during that time, the property can still be considered ‘occupied’, allowing you to qualify for PRR.
However, there are special time limits and requirements.
You can be absent from the property for up to three years (either continuously or in total).
During the absence, you must provide proof of employment overseas with duties performed abroad.
For absences up to four years, you need special proof: either that your work location was too far from the property to use as a residence, or that your employer required you to live elsewhere (matching our client’s four-year period, thus requiring evidence).
Generally, you should occupy the property before and after the period of absence as your sole or main residence.
If you can’t return to the property due to job constraints after the work-related absence, the period can still count as occupation.
6. Other rules
For gains arising after April 5, 2015, the following situations do not qualify for PRR:
Non-UK residents who do not spend at least 90 days in their UK home in a tax year.
UK residents claiming relief on overseas homes if they don’t spend at least 90 days in that home in a tax year.
For married couples:
Unseparated spouses and civil partners are considered one person and can only nominate one property as their main residence.
Transfers between spouses/civil partners have special rules, effectively backdating the period of ownership.
Divorce situations have special rules that can extend PRR.
7. Some advice from TB Accountants
If you qualify for PRR, you could save 18% or 24% on taxes when selling your property, which is a significant benefit. However, there are practical difficulties. The first is the absence issue (not living in the main residence for a period), which is complex. HMRC does not specify a minimum time required to occupy a property to qualify as a main residence for PRR.
This depends on the ‘quality of residence’, meaning you need to demonstrate an expectation of some degree of permanence, continuity, or persistence when you move in and live there. Some tax advisors suggest living there for 6 to 12 months, while others recommend different durations.
The second challenge is having multiple properties or selling a main residence while buying a new one, where PRR rules differ based on specific circumstances.
The third challenge arises in cases of separation or divorce, affecting how residence periods are calculated.
We recommend consulting a tax advisor in advance if you plan to use PRR to organize a CGT bill correctly, avoiding overpayment or underpayment.