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Principal Private Residence Relief 6th May 2012

Posted in: Capital Gains Tax

So you own your own home and when you sell it there’ll be no tax to pay – right? Maybe.

In simple terms, that’s generally true. However, if you’ve never lived in the property then there will be Capital Gains Tax (CGT) to pay when you sell it. When a homeowner sells their property they get a CGT relief known as Principal Private Residence (PPR) relief. If they never lived in the property, then it was never their residence so no relief is given.

What happens if they have lived there, but then moved out for a time? This is where things start to get a bit interesting. Let’s suppose Bob has owned his house for the last 10 years. He purchased the house for £150,000 and sold it 10 years later for £400,000. He’s made a gain of £250,000.

Sale Proceeds 400,000
Less: Purchase Costs (150,000)
Capital Gain 250,000

He initially lived there for the first 3 years, after which time he moved in with his girlfriend. He let the property out for the next 7 years after which time he sold the house.

To work out the gain that is taxable we have to look at Bob’s actual residency of the house (his first 3 years) and his deemed residency. Because Bob actually lived in the house for a period, the PPR relief rules say that the last 3 years will always be deemed residency. This means that Bob has 6 years where he was resident (actual or deemed) and 4 years where he was absent.

[Update 1: the PPR relief rules have changed from 6 April 2014. Now only the last 18 months count as deemed residence instead of the last 36 months. The 36 month rule still applies if you are disabled or in long-term care].

[Update 2: It was announced in the Budget 2018 that the final period of exemption is to be reduced from 18 months to 9 months with effect from April 2020. Again, the 36 month rule still applies for those who are disabled or in long-term care].

Years of ownership Resident Absent
First 3 years 3
Lives with girlfriend 7
Deemed resident (last 36 months) 3 -3
Total 6 4

The gain that qualifies for PPR relief is therefore limited to 6/10 (six years out of ten). Bob will therefore be taxed on 4/10 (£250,000 x 4/10 = £100,000) of the gain.

Capital gain 250,000
Less: PPR relief (£250,000 x 6/10) (150,000)
Chargeable gain 100,000

Fortunately, Bob let the house out during this period, so he will also qualify for lettings relief, but lettings relief is capped to a maximum of £40,000. In this instance, Bob will get the maximum lettings relief. So Bob can get a further £40,000 off the taxable gain of £100,000, leaving him with a capital gain of £60,000 (£100,000 – £40,000).

[Update: It was announce in Budget 2018 that the rules around lettings relief are to be reformed. From April 2020, lettings relief will only be available to those who are in shared occupancy with a tenant].

What about second properties? Unfortunately, PPR relief can only apply to one property at a time. This is true of couples as well, so if you own one property and your spouse owns another, you can’t each claim PPR relief on the respective properties. However, if you told HMRC which was your principal private residence when you bought your second property, then you can switch the PPR status just before you sell the second property and get the last 3 years as deemed residence.