Private Residence Relief and Capital Gains Tax Explained

Property and tax letter blocks sitting on top of coins with four little houses on top.

Whether you’re a seasoned home buyer or someone taking their first tentative steps on the housing ladder, understanding your tax liabilities is essential to a smooth property transaction.

Most of us have a solid understanding of our financial responsibilities when selling a home, which is good, however, when it comes to making what for most of us is the largest financial commitment of our lives, having a thorough understanding of every aspect, of such a purchase is paramount.

When it comes to Capital Gains Tax (CGT), many homeowners have questions about the amount, if any, they’re liable to pay. In short, when selling a home, most homeowners will NOT have to pay CGT, but it’s not quite as cut and dry as that. Some homeowners can take advantage of Private Residence Relief.

Interested in learning how private residence relief can help you to offset the cost of CGT when moving home? Keep reading below.

Circumstances for PRR Eligibility

To be eligible for PRR, an individual’s place of residence (‘dwelling- house’) must be the individual’s only or main residence during a period of ownership, and the dwelling-house must not have been acquired in whole or in part for the purpose of realising a gain from selling the property. In other words, the property must not have been bought and then sold once the owner realised it was financially profitable for them to do so.

Do People Rely on Private Residence Relief?

The short answer is yes. Most people selling their homes rely on PRR to avoid CGT. However, this isn’t always black and white. There are circumstances when PRR is restricted or denied to homeowners. Two circumstances that factor into any decision include travel restrictions and working from home.

How Is Private Residence Relief Calculated on Capital Gains?

Normally, you do not have to pay Capital Gains Tax (CGT) on any profit you have made on your primary home throughout the duration of ownership. This is what Private Residence Relief is for.

The formula for calculating PRR is as follows:

Gain x period of ownership or occupation = Private Residence Relief

The period of ownership or occupation begins the date of completed purchase and you have the right to occupy the property.

Therefore, if you’ve lived in your private residence throughout the entire period of ownership, 100% of the gain is exempt and you don’t need to pay any tax liability.

In terms of PRR, occupation is defined as both actual and deemed occupation. Actual occupation is defined as periods when the homeowner is actually occupying the property. Deemed occupation is defined as periods when the individual is physically absent from the property, but for PRR purposes, they’re treated as if they actually live there.

Many Homeowners Misunderstand PRR

Many homeowners rely on PRR to sell their home in a way that’s financially viable. However, you might be surprised to learn that PRR is less understood that CGT and Stamp Duty. This is despite PRR being one of the most valuable tax reliefs in the UK.

In fact, according to statistics, PRR cost the Treasury an estimated £31.5bn in the 2023/2024 tax year alone. The main culprit of this misunderstanding is because PRR rules can be difficult to follow.

PRR Rules

To clarify the PRR relief rules, we’ve outlined them below in four bullet points:

  • The property sold has been the owners main or only residence throughout the whole period of ownership
  • The owner has not been absent from the property at any time, apart from the last nine months of ownership, or at specifically allowed absences
  • No part of the property has been used exclusively for business purposes
  • The garden or grounds do not exceed half a hectare or are required for the reasonable enjoyment of the property as a home

What are the CGT Property Rates?

CGT property rates are 18% or 24% for basic taxpayers and 28% for higher taxpayers. These tax rates are payable on any property profit earned minus CGT allowance.

Tax specialists, such as Ward Goodman, can help to advise you of your tax liabilities, including which rate you fall into. It’s important to note that CGT is only charged at 18% or 24% on the amount that the seller has available in the basic rate band, so many sellers may still end up paying the additional rate.

Regions which have seen high property value increases offer suffer from the whole basic rate being used. Any gain is therefore often taxed at 28%, even if the taxpayer is a basic rate income taxpayer. Therefore, the tax rate you’ll pay depends on the size of the gain and any other taxable income, and not just if you’re a basic rate taxpayer.

What Is My Capital Gains Tax Allowance?

Every taxpayer has an annual CGT allowance and can therefore earn a certain amount tax-free. The Capital Gains Tax allowance for the 2023/2024 tax year is £6,000, a reduction of £6,300 from the previous tax year’s allowance of £12,300. As of 6th April 2024, CGT allowance stands at £3,000.

However, if a property is jointly owned with your spouse, this figure can be combined to enjoy greater tax relief when you sell your home.

Capital Gains Tax Liability and PRR Relief

There are several instances in which an individual can end up liable for a taxable, chargeable gain resulting from the sale of a property. For instance, if two individuals each own a property and then move into one of them together for reasons such as a personal relationship or lengthy renovations, they may incur a Capital Gains Tax liability.

When a CGT liability arises from the sale of a residential property, typically this must be report this on a CGT return and pay the incurred tax within 60-days of completion. According to data released by RSM UK following a freedom of information request, HMRC confirmed that 51,800 CGT returns filed in the 2021/2022 tax year included claims for PRR relief.

In the past, even those taxpayers who could not benefit from full gain PRR could have potentially relied on CGT annual exemption to cover any unexpected taxable, chargeable gain. However, with the Chancellor further cutting CGT allowance thresholds to £3,000, any non-taxable gains have become increasingly scarce.

Limited Margins

As you’ve undoubtedly deduced, cutting CGT thresholds from £12,300 to £3,000 in two short tax years gives homeowners limited margin for error to maximise their non-taxable income when selling a home.

This could result in more homes liable for CGT being sold across the country. There are reports that lobbyists are focusing on increasing CGT rates and proposals are being included in the manifesto pledges of some political parties.

It’s not hyperbole to assume that some homeowners may well find themselves facing surprisingly high tax bills when they move home, whereas other homeowners may not even know that they will be facing a significant CGT liability and the prospect of incurring HMRC penalties and interest charges.

Ward Goodman Can Help

If you’re unsure if you qualify for PRR, or if you have any other questions about CGT arising from the sale of a property, contact Ward Goodman today for more information and sound financial advice.

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