Private Residence Relief (PRR) is a tax relief in the UK. PRR helps homeowners save money when selling their primary residence.
Under this relief, any capital gain arising from the sale of a property that has been the taxpayer’s main home throughout the period of ownership is generally exempt from Capital Gains Tax (CGT). This means that if you sell your primary residence, you usually do not have to pay tax on any profit from the sale.
The Private Residence Relief applies to the time the property was occupied as the main home, and certain periods of absence may also qualify for relief, such as time spent working abroad. Additionally, the final nine months of ownership automatically qualify for PRR, regardless of whether the owner was living in the property during that time. This relief is particularly beneficial for those who have lived in their homes for a significant period, ensuring that they can reinvest the full proceeds of their sale into their next property or other ventures without a CGT burden.
Private Residence Relief is crucial as it provides significant financial relief to homeowners by exempting them from Capital Gains Tax (CGT) on the sale of their primary residence. This exemption encourages homeownership by reducing the financial burden associated with selling a home, allowing individuals and families to retain more of their property’s appreciated value.
To qualify for Private Residence Relief, several conditions must be met. The property must be the taxpayer’s main residence at some point during their ownership. Partial relief is available if the home was not always the main residence, calculated based on the proportion of time it was used as such. Certain absences, such as periods spent working abroad may still qualify for relief.
Additionally, the final nine months of ownership automatically qualify for PRR, irrespective of the property’s current occupancy status. If the property has been your main residence at some point during ownership, the last 9 months of relief are available.
If the property includes grounds or gardens (up to half a hectare) PRR is also available on the value attributable to those.
PRR is only applicable to individuals, not companies, and there must be no significant business use of the home. These conditions ensure that the relief is targeted at genuine homeowners using their property primarily as a residence.
When a taxpayer owns more than one property which they use as a home, they can elect which property should be considered their main residence for tax purposes.
The election must be made within two years of acquiring the second property. The chosen property will then be eligible for PRR, exempting it from Capital Gains Tax (CGT) upon sale. The election can be changed later if circumstances change, as long as the new election is made within two years of a change in the combination of residences.
In a recent tribunal case, the primary issue was whether PRR should apply to the sale of Emmott Close, London, for the year ended 5 April 2016. HMRC disallowed the claim, contending that the property was not the appellant's only or main residence during the relevant period. The appellant asserted that he lived at Emmott Close from April 2010 to October 2013 with his then-girlfriend, but HMRC argued that there was insufficient evidence to prove this.
The tribunal had to decide if the appellant had met the burden of proof to show that Emmott Close was indeed his main residence, providing the necessary degree of permanence and continuity to qualify for PRR.
The appellant argued that he lived at the property from April 2010 to October 2013 with his then-girlfriend, asserting it was his main residence during this period. He provided some evidence like mortgage statements and utility bills addressed to Emmott Close to support his claim.
HMRC, on the other hand, argued that the appellant did not live at Emmott Close as his main residence, pointing to a lack of significant evidence such as council tax bills or registration on the electoral roll at that address. They highlighted inconsistencies, such as the appellant's failure to change his bank address and his statement that any residence at Emmott Close was unexpected and temporary, which undermined the claim for PRR. HMRC contended that the appellant's living arrangement lacked the necessary degree of permanence or continuity to qualify for the relief.
The result of the tribunal case was that the appeal was dismissed. The tribunal concluded that the appellant had not discharged the burden of proof required to show that 19 Emmott Close was his only or main residence during the relevant period. Despite his assertions, the evidence provided was insufficient to demonstrate that he had lived at the property with the necessary degree of permanence or continuity to qualify for PRR. Consequently, the relief was disallowed, and the tax assessment by HMRC stood.
To successfully claim PRR, you must ensure the property is your main residence for a significant period. You should retain documentation, such as utility bills, council tax statements, and bank statements, all addressed to the property. Register to vote at this address and update it with banks and HMRC. Demonstrate long-term commitment for example by participating in local activities and enrolling children in nearby schools. Document any allowable periods of absence and keep records of significant events that show the property is your primary home.
If in doubt, please contact us for professional advice and thereby reduce the risk of disputes with HMRC.
