Posted: 06 / 08 / 2024
With a change in government, and an explosion of rumoured tax changes, reliefs and allowances, it is essential for individuals to protect those reliefs and allowances currently available to them.
It would be fair to say that your home is probably the largest personal investment you will make during your lifetime. Taxpayers have greatly benefitted from Private Residence Relief (PRR) relief since its introduction via the Finance Act in 1965 (in its original form), yet people are still unaware of the conditions to be met if any gain is to be completely exempt from tax.
A typical journey through life could be as follows:
- Purchase your first property
- You then meet a partner
- You start a family and then move on to a larger ‘family’ home
- Until you reach retirement (or the kids move on) and then look to downsize (to release equity) during the later stages of your life
Throughout this cycle, for the normal taxpayer, PRR will have offered considerable CGT savings as the likely gain from each property sale would very likely have been exempt from tax.
Yet some people still fall foul of this, and most of the time this is unnecessary.
What is PPR Relief?
PRR relief means that any gain on the disposal of your main residence is usually exempt from CGT, provided you meet certain conditions:
- The property has been your only or main residence throughout the period of ownership, apart from all, or any part of, the final nine months of ownership (for disabled persons or those moving into a care home, this final period can be up to 36 months).
- You have not let out part of the property (this does not apply to having a lodger).
- Part of the property has not been used exclusively for business purposes. It’s exclusivity that is the issue here. Using part for business, so long as there is also non-business use, is acceptable.
- The grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total unless you can demonstrate that a larger area is required for reasonable enjoyment of the property.
- You have not been absent from the property during the period of ownership other than for an allowed period of absence or because you have been living in job-related accommodation during your period of ownership.
- The property was not bought in order to make a gain on disposal.
For married couples and civil partners, it should be noted that only one property per couple can count as the main residence.
But what is a ‘Home’?
What, though, does it mean to occupy somewhere as your residence? The word residence isn’t defined in the legislation, so HMRC will be on the lookout for evidence that a dwelling is actually your home.
A home can be a building or part of a building, a vehicle, vessel, or structure of any kind used as a home by an individual. It must be somewhere that an individual uses with a sufficient degree of permanence or stability to count as a home.
Given the very attractive CGT relief available, it is imperative that you protect your entitlement to the relief where possible.
This, HMRC says, is a test of ‘quality rather than quantity’, involving a degree of ‘permanence, continuity and the expectation of continuity’. Above all, it’s a question decided on the facts of the individual case.
What if you have more than one property?
Nowadays, it is not uncommon to have two (or more) properties, however, this increases the complexity of the position. A person can only have one main residence for tax purposes at any one time and a married couple or civil partners can only have one main residence between them.
This can easily occur when each partner has a property prior to meeting each other, or whereby you own a second property closer to work and stay there during the working week to ease your daily commute.
To be in the running as the main residence, a property must be lived in as a home. This means that a property which is let out cannot be a main residence while it is let. Any property which is lived in as a home for at least some of the time can be the main residence for CGT purposes.
It is not necessary for the main residence to be the home in which the individual or couple spend the majority of their time. As was illustrated by the infamous MP ‘flipping’ scandal, it is perfectly acceptable to choose whichever property achieves the best possible tax result as the main home and to swap them about to ensure the relief is maximised.
You can nominate one property as your main home by writing to HM Revenue and Customs (HMRC). You must include the address of the home you want to nominate and from what date this applies. All the property owners must sign the letter.
This needs to be done within 2 years every time your combination of homes changes.
Get your house in order
There have been tax cases whereby individuals have sold property and tried to claim PRR on the resulting gain. Due to the disorganised nature of the individual’s affairs, the failure to make the necessary application as mentioned above and absence of supporting documentation, HMRC have challenged these claims and been successful.
Sometimes it comes down to facts and circumstances, therefore the more ‘quality’ or ‘permanence’ you can evidence, should benefit you should HMRC ever challenge your claim. Such practices can include….
- Registering to vote at the new address
- Ensuring you update the DVLA and your driver’s licence is accurate
- Updating your records with HMRC
- Ensuring you are paying the council tax bills at the necessary address
- Paying for the television licence
- Registering with a local doctor/dentist
- Car ownership and insurance documents are updated
Whilst all of the above may not always be possible, you should ensure sufficient arrangements are made to support any future claims/elections.
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