Private Residence Relief (PRR) is a valuable Capital Gains Tax (CGT) relief when disposing of property in which you reside. PRR is the reason we generally dispose of our homes free of CGT. For those who have a legal or beneficial interest in one property in which they have resided in for their entire ownership period, PRR is simple to apply and full relief for CGT purposes will be given, with no CGT due on the disposal of a main residence. There can, however, be complexities attached to PRR. Here, Tom May considers the complications multiple properties and periods away can bring.
Do I need to make a nomination for my main residence?
When an individual owns more than one property or is renting another property as their home, careful thought is needed. When you acquire a second property, you may need to consider which property is your main residence and to write to HM Revenue & Customs (HMRC) to nominate this property as your main residence.
In the absence of a nomination, HMRC can determine which property is your actual main residence, based on their interpretation of the facts, which may be counter to your intended PRR claim. You have two years from every time your combination of residences changes to nominate a property as your main residence.
It is vital to note that a married couple (and civil partners) can only have one main residence. A nomination by one spouse or partner takes effect for both parties.
What if I live away from my property for a period of time?
There are some reliefs available for those who live away from their property for a period of time, which allow for their PRR claim to still be valid. This is known as ‘deemed occupation’. An individual can live away from their main property for up to three years for any reason, four years when working away from home for work within the UK, and finally, an unlimited amount of time if they work abroad. For these periods of absence to be valid for PRR, the individual must return to their residence after this period of absence. Additionally, the final nine months of ownership of a property qualify as ‘deemed occupation’. This does not, however, count as the individual returning to their residence after a period of absence.
If you own a property and have to live away from your owned property and rent another property as a home, even though you do not own a second property, you are considered to have had a change in your combination of residences. In the absence of a nomination, HMRC will determine which of the two properties is your main residence. This could invalidate your PRR claim. It is therefore important that a nomination is made to ensure that your PRR claim is not denied.
The only circumstance where this does not apply is when the property is occupied under licence. A licence is a permission to reside in a property which may be gratuitous or contractual. An example of a gratuitous licence is staying with family and friends, where
commercial rent is not charged. An example of contractual licence would be staying in lodgings or a hotel.
PRR is an extremely valuable relief and these two areas are only some of the potentially very costly pitfalls which can be faced. An apparently simple relief can in reality prove very complex to apply, with rules having unexpected mathematical results. It is important to plan ahead and monitor your position regularly to ensure you will benefit fully as circumstances change. We are happy to discuss your circumstances and how to optimise your PRR position.
If you have a query please contact your usual contact at Ellacotts.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.