PRIVATE RESIDENCE RELIEF (PRR) OVERVIEW

How does PRR work?

PRR works by reducing the chargeable gain realised on the disposal of a residential property by an appropriate amount, depending on the particular circumstances. However, it can only apply to a property which has been used as the only or main residence at some point during the period of ownership. This means that selling a property which has always been let out or was purchased with the sole intention of renovating and selling at a profit won’t attract PRR.

In the most straightforward circumstances, e.g. someone selling their only home and immediately buying another, relief will be available in full because the occupation will normally be for the entire period of ownership. Where this is the case, the gain does not need to be reported to HMRC, either under the UK property reporting service or via self-assessment if you are tax resident in the UK.

If you are  non-resident, you need to report any disposal of UK property, regardless of whether there is tax to pay.

Example

Jodie purchased her house in 2000 for £55,000. She sells it in 2023 for £225,000, having lived in it since completion. After selling, she moves in with her daughter. As Jodie occupied the house as her only residence throughout the period of ownership, PRR will reduce the chargeable gain from £170,000 to nil.

PRR also extends to land that forms the grounds or garden of the property that qualifies for relief.

Relief is not always available in full. It may be restricted where:

• the property was not occupied as the only or main residence throughout the period of ownership
• part of the property has been used exclusively for business purposes
• the residence is in a country where neither the person making the disposal nor their spouse or civil partner is tax resident in that country.

In such cases, it’s necessary to look at the facts in order to determine the amount of relief available.

Note that periods of ownership before 31 March 1982 are ignored for the purposes of calculating relief. Where a property was purchased prior to that date, the period of ownership is treated as commencing on 31 March 1982. Similarly, the purchase price is replaced by the March 1982 value when calculating the overall gain.

If a disposal of a property results in a loss, the loss will not be an allowable loss (i.e. it can’t offset capital gains) to the extent that a gain would have been covered by PRR.

 

What types of property does the relief apply to?

There is no statutory definition of a “residence”in the tax legislation. The relevant part of Taxation of Chargeable Gains Act 1992 states that the relief applies to a “disposal of, or of an interest in, a dwelling-house or part of a dwelling-house”. Unhelpfully, “dwelling-house” isn’t defined either.

The question of what constitutes a dwelling-house has been considered in a number of court cases. In addition to houses and flats, a caravan which is connected to main services can qualify for relief. However, mobile caravans which are simply parked will not; though as a tangible movable asset it would be exempt as a wasting chattel in any case. This is confirmed by HMRC’s guidance, which also extends the principle to houseboats that have been used as an immobile residence for at least six months.

PRR can also apply to multiple buildings in some circumstances, e.g. a house and a detached garage. For other types of separate building, e.g. outbuildings, the availability of relief will depend on a number of factors, including the proximity of the buildings to the main house.

 

Does the property have to be located in the UK?

There is no restriction of PRR by reference to the location of the property. However, since 2015 there are additional rules to consider for disposals of overseas properties, and for UK properties that are disposed of by non-UK residents.

 

Is PRR only available to individuals?

A company cannot claim PRR in respect of a gain realised on disposal of a residential property. Trustees of a settlement can claim PRR if the trust property is occupied by a beneficiary as their only or main residence. This is subject to anti-avoidance rules.

 

Is claiming PRR the same as “flipping”?

“Flipping” actually refers to changing a nomination of a main residence where there are multiple properties that are used as a home. This can be a useful strategy if more than one property is genuinely lived in, and is discussed in Chapter 3. Flipping came in for much misguided criticism in the late 2000s when the MPs expenses scandal broke, and the term is heard less frequently than it used to be.

Flipping is also used among property investors as a term generally meaning to buy a property, renovate it and sell it quickly at a profit. Whilst this has little to do with tax, it is worth keeping in mind that adopting such a strategy will almost certainly see a claim to PRR challenged as the intention is to realise a quick gain rather than long-term occupation as a home. HMRC might even argue that the activity amounts to a trade, meaning the properties would be treated as trading stock, and the profits chargeable to income tax.

 

PARTIAL OCCUPATION

What if the property has not been occupied throughout the period of ownership?

Relief will be restricted in circumstances where the property has not been occupied as the only or main residence for the complete period of ownership. This restriction is made on a time-apportioned basis, i.e. generally the fraction of the gain qualifying for relief is the period of occupation divided by the period of ownership. However, certain periods of absence may be treated as if they were periods of occupation, so must be taken into account. Perhaps most notably, the final nine months of ownership are always deemed to be occupation to cover circumstances where a new residence is purchased, but there is a delay in selling the old residence, i.e. a bridging period.

Where the final nine months overlaps with a period of actual occupation, the overlapping period is only counted once.

Example

Jamila purchased a property in March 2013, but did not occupy it as her main residence until March 2018. In March 2023 she sells it realising a gain of £80,000. The final nine months, i.e. from July 2022 to March 2023, count as deemed occupation, but as this coincides with a period of actual occupation, the correct fraction to use is 60/120 months, not (60+9)/120. Note that if the pattern of Jamila’s occupation had been reversed, i.e. she occupied the property as her main residence from the date of purchase until March 2018, the final nine months would have increased the PRR available.

This so-called final period exemption was 18 months for disposals prior to 6 April 2020, and 36 months for disposals made before 6 April 2014. The longer 36-month period still applies where the disposal is made by a person (or their spouse or civil partner) who, at the time of the disposal, is disabled or is a long-term resident in a care home, and who has no other property on which they can claim PRR.

 

Is it enough to just stay a few nights to claim this relief?

Merely being “present” in the property is not sufficient to occupy it as a home. There has to be a clear intention to occupy it as the only or main residence. There have been cases where short periods of occupation and ownership have been sufficient to secure relief as it was clear that the initial intention was to occupy the property as a home but the plans changed, e.g. an unexpected offer that was too good to resist. Similarly, there have been cases where relief has been denied due to a lack of evidence that this “quality of occupation” was present, where instead it appeared the owner was aiming to turn the property around at a quick profit. Merely staying in an empty property with a mattress and a sleeping bag is unlikely to convince HMRC. We look at cases surrounding occupation, and how you can strengthen a claim in Chapter 8.

 

What other periods of absence qualify?

Subject to certain conditions, the following periods of absence can qualify as deemed occupation:

• up to three years for any reason
• up to four years for reasons of employment elsewhere
• any period resulting in a requirement to work abroad
• up to two years at the start of the period of ownership where there is a qualifying delay in occupation.

 

What are the conditions for the three-year period?

A period of up to three years can be added as deemed occupation when calculating the available PRR where the property was occupied as the only or main residence both before and after the period of absence. There is no requirement for the occupation periods to be immediately before, or after, the period of absence, e.g. a different property could be the main residence during this period.

Example

Let’s consider Jamila again, but this time complicate things a little. Let’s say she purchases the property in 2013 as before, and immediately occupies it as her only residence. However, in March 2014 she moves into another property belonging to her girlfriend and stays until March 2019. The second property was her main residence for that five-year period, even though her girlfriend was the owner. She moves back into the first property after selling the second one in March 2019 then sells the first property in March 2023 as before. She has five years of actual occupation as before. However, because she has re-occupied the property after a period of absence, she can add three years of the five-year absence period, meaning she has 60 + 36 months of occupation. This means the PRR is 96/120 x £80,000 = £64,000. The remaining gain is £16,000.

As the gain is not covered by the annual exempt amount (£6,000 for 2023/24), it will need reporting via the UK property reporting service within 60 days of completion, unless there are losses arising prior to that date that can reduce the gain such that no tax is payable. A payment of the tax estimated to be due must also be made within 60 days. For further information on the reporting requirements, see HMRC's guidance.

 

What about the four years relating to employment?

For an absence to qualify under this provision, the reason for the absence must be that the individual was prevented from living in the relevant property due to their place of work, meaning they needed to live elsewhere, or were required to do so by an employer as a condition of employment, as long as this is reasonable in order to “secure the effective performance of the employee”.

This also applies if the individual lives with their spouse or civil partner, and it is the spouse or civil partner’s employment that prevents the individual from living in the relevant property. Again, in order to qualify as a deemed occupation there needs to be a period of initial occupation, and a period of subsequent reoccupation following the absence.

HMRC accepts that this can also apply to a self-employed person, as well as an office holder or employee - see CG65040 (https://tinyurl.com/3s83fb2z).

 

Periods spent working overseas?

This relief applies for periods of any length where the individual works in an employment where all the duties are performed outside the UK. Again, relief is preserved where a spouse or civil partner’s employment is the one that affects the occupation. However, self-employment is not sufficient to qualify for this deemed absence.

It’s important to note that the maximum periods of deemed occupation discussed in 2.4, 2.5 and 2.6 can only be used once in respect of a single period of ownership. For example, if an individual purchases a property and lives in it for a year, lives elsewhere for three years, reoccupies it for a year, leaves again for another three years before reoccupying it and then selling it, the “any reason” absence can only be used for up to three years. It’s irrelevant that the property was vacated and reoccupied twice. However, the periods don’t need to be continuous, so if the two periods of absence in this example were 18 months each, they would be covered by the full three years.

 

Are the periods of initial and subsequent occupation subject to any further conditions?

There are no restrictions on when the periods of occupation occur, for example the initial occupation is not required to coincide with the start of the period of ownership. Similarly, the period of subsequent reoccupation is not required to commence immediately following the absence. The key phrase in the legislation is “there must be a time during which the dwelling-house is the individual’s only or main residence”. The requirement for an initial period is referred to as condition A, and the requirement for a subsequent period of reoccupation is part of condition B. However, there are two alternative ways to satisfy condition B besides reoccupation.

As long as there was an initial period of occupation, condition B can also be satisfied if there was no reoccupation where:

1. Reoccupation was prevented due to their place of work meaning they needed to live elsewhere, or were required to do so by an employer as a condition of employment, as long as this is reasonable in order to “secure the effective performance of the employee”. Or
2. The individual lived with their spouse or civil partner to whom 1 applied.

 

What if more than one permitted period of absence applies?

The periods are distinct and cumulative, so if there is a four-year absence due to employment, and a three-year absence for some other reason, seven years of deemed occupation can be included in the PRR calculation, as long as condition A and B are met. The “final period” exemption may also be added if the property wasn’t occupied during those months. The period of absence provisions can be applied in the way that best suits, illustrated by the following example:

Example

Dev bought a house in Bournemouth in January 2013 and lived in it as his only residence. In October 2013 his employer required him to work in Glasgow. He lived in a flat provided by the employer until October 2018. Then his employer transferred him to work in Cologne and also provided a flat there. He ended his employment in March 2020 and toured Europe until November 2020. Then he returned to his house in Bournemouth and occupied it as his only residence until he sold it in January 2024.

The whole of the period of ownership qualifies for relief for the following reasons:

• January 2013 - October 2013 - only or main residence
• October 2013 - October 2017 - four years’ absence by reason of employment  
• October 2017 - October 2018 - one year’s absence for any reason
• October 2018 - March 2020 - period of absence due to employment outside the UK
• March 2020 - November 2020 - seven months’ absence for whatever reason
• November 2020 - January 2024 - only or main residence.

The period of absence legislation is applied in the way which is most beneficial to Dev. For example, if the period from October 2013 - October 2018 had been treated as qualifying primarily under the “any reason” provision that would have used up the three-year allowance and so no relief would have been available for the period between March 2020 and November 2020. The periods of absence are cumulative. In this example, the total qualifying period is seven years two months.

Note that in the example, the final nine months’ exemption is not added to the period of actual occupation, as discussed above.

 

What is the initial two-year allowance for delayed occupation?

Prior to April 2020, there was an extra-statutory concession that gave HMRC the discretion to allow a period between the acquisition date and the date of occupation of a property to qualify as deemed occupation in some circumstances, including where a dwelling-house was being built on the land, arrangements were being made to sell a previous residence, or alterations or redecoration were being carried out. In all circumstances, the individual had to take up residence later on. HMRC would permit a period of up to twelve months, or 24 months where there were “good reasons” for the additional delay - usually circumstances beyond the individual’s control.

Following a number of Tribunal hearings, the delayed occupation provision was put on a statutory footing. For disposals made on or after 6 April 2020, the period between acquisition and occupation will be treated as a period of occupation for the purposes of calculating PRR, with a limit of two years on condition that nobody else uses the property as a residence during this period.

The delay in occupying the property must arise because it requires:

• construction, e.g. where a bare plot of land is purchased
• renovation
• redecoration; or
• alteration.

The two-year limit is not simply a cut-off for relief; the individual has to actually take up occupation within two years. So, if a property is purchased and is renovated for three years before the individual takes up residence, no deemed occupation can be claimed, i.e. you don’t just claim the two years. Where this is the case, there is no initial occupation - so none of the other permitted period of absence provisions, e.g. three years for any reason, can apply and the period is simply treated as non-occupation.

HMRC’s guidance at CG65013 (see here) confirms that where the delayed occupation provision applies, there may be two properties that qualify for PRR with overlapping periods. There is no need to make a main residence nomination here.

 

When does the period of ownership start?

In most circumstances, this will be self-evident. A straightforward purchase of an existing property will mean the period of ownership starts on the purchase date.

Exchange v completion

The Court of Appeal has determined that the relevant date is the date of completion, not the date that contracts are exchanged (Higgins v HMRC [2019] EWCA Civ 1860,see https://tinyurl.com/8jubptmj) HMRC tried to argue that it should be the date of the exchange of contracts, as this is what determines the date of acquisition or disposal for capital gains tax (CGT) generally. However, the court pointed out that the PRR legislation concerns the operation of relief, rather than the administration of CGT in general. It also noted that to begin the period of ownership for PRR purposes at the date of exchange of contracts would mean anyone that sells a property would forfeit a small element of relief due to the delay between exchange and completion. This was clearly not the intention of Parliament.

Dwelling not in existence

There can be further complications where land is purchased with no dwelling currently on it. How can you be absent from something that doesn’t exist? This was considered in a recent First-tier Tribunal (FTT) hearing. Mr and Mrs Lee (L) bought a property in October 2010 and soon after had it demolished. They never lived in it. They built a new property on the land which was completed in March 2013. They occupied the property as their home until they sold it in May 2014, making a capital gain in the process of more than £550,000.

The Ls claimed PRR on the whole gain they made from the sale meaning that there was no tax for them to pay. HMRC refused part of the claim saying that as the Ls had owned the asset for 43 months and occupied the dwelling for only 15 months, PRR only applied to 15/43rds of the gain. HMRC amended the Ls’ tax returns to reflect this and so they appealed. The outcome of the case turned on whether for the purposes of PRR the ownership period started in 2010 when the old property and land was purchased or when the Ls first occupied the new property as their home, which was soon after the construction was finished.

HMRC’s main argument was that the building and the land on which it was sited was a single asset. It said that if the building and the land were treated as separate assets, the Ls would be “having it both ways”. Specifically, in calculating the gain the Ls correctly deducted the costs of creating the new dwelling but also were claiming PRR for the growth in value of the land prior to it containing the main residence. Secondly, HMRC said that if its main argument failed, the PRR legislation states that where a taxpayer has “different interests” in a dwelling at “different times” the ownership period begins from the start of the earliest interest (which it said was 2010). To support both arguments HMRC cited previous decisions with similar but not identical facts.

The FTT easily dismissed HMRC’s second argument as a misreading of the legislation. It clearly only applied where a taxpayer has had different legal entitlements to the property at different times, e.g. where the taxpayer owned a lease on a property and later purchased the freehold.

The FTT acknowledged HMRC’s first argument that the sale of a building includes the land it occupies. It then considered the case law HMRC had cited but found that neither it nor the legislation clearly defined what a “dwelling” was for the purposes of PRR. It decided that the usual meaning of the word referred to the building itself and by inference the land it sat on. Therefore, the fact that the Ls made a gain on the land prior to occupying the property was irrelevant. PRR applied to the combined gain. The FTT therefore ruled in favour of the Ls.

This is obviously a favourable result. However, it is important to note the FTT ruling is not binding. HMRC has appealed against the decision to the Upper Tribunal, so be aware that if relying on the logic applied by the FTT in respect of a claim for PRR, it is likely to be challenged by HMRC.

 

What if part of the property is used for a business?

Any part of a property used exclusively for business purposes cannot qualify for relief. Consequently, any gain on disposal will need to be apportioned (on a fair and reasonable basis) between the business and non-business use. The test is applied throughout the entire period of ownership (including the last nine months). The chargeable part of the gain may be eligible for relief on replacement of business assets, i.e. rollover relief. See here for further information.

It is also possible that the use of part of the property changes during the ownership period, for example part of it is used for a period for the purposes of a trade. Again, there may need to be a restriction, but it is the relief that is restricted rather than the gain. The restriction will be made on any “just and reasonable” basis, e.g. by reference to both the extent of the part of the property, and the period it was used for the relevant purpose..

HMRC’s guidance at CG64690 (see here) confirms that no restriction should be made where an employee or director uses part of the residence for work purposes, unless a “substantial part of the residence is used exclusively as an office or for other purposes of the office or employment”.

 

MULTIPLE PROPERTIES

What if I have more than one home?

It’s not uncommon for people to have more than one property that they use as a home during the respective periods of ownership. However, there can only be one “main” residence at any particular time which will need examining when a disposal takes place. There is no requirement for a main residence to be owned. It is prudent to take advantage of part of the legislation that permits a nomination as to which residence is to be treated as the main residence. However, there are conditions attached to this. First let’s consider what happens if there isn’t an election, which should demonstrate exactly how useful making one can be.

 

How does PRR apply if there are multiple properties and no election?

Where there is no election, the main residence for any particular period is determined by the actual historic pattern of occupation. Usually, this means the property that is used as a home the most.

Example

Mohammed purchases property A near his place of work in 2010. He has no other properties available as a residence until 2015 when he purchases a second home, property B, in a rural village and stays there from Friday evening to Monday morning most weekends. In the absence of an election, property A will likely be held to be the main residence unless and until the pattern of occupation changes so that property B is lived in more frequently.

However, HMRC’s guidance at CG64545 (see here) acknowledges that, in some cases, the main residence will not be the one at which the individual spends the most time. For example, following the second property purchase Mohammed may view property A as simply somewhere to stay that is convenient for work. If he has a family that stay at property B through the week, and his children go to school in the local area, it would add weight to an argument that property B is the main residence. The guidance goes on to give a non-exhaustive list of factors that will be considered when identifying the main residence:

• For each dwelling-house, what is the timeline of events from the date of acquisition until the date of disposal? When was the dwelling-house first and last used as a residence? It may be necessary to look at periods before the first use or after the last use, e.g. where the individual was living at someone else’s property.
• If the individual is married or in a civil partnership, where did the family spend its time? Spouses or civil partners who are living together can only have one main residence between them.
• Are there any dwelling-houses owned solely by the spouse or civil partner that also need to be considered?
• Is the size and location of the dwelling-house suitable for it to be the main home of the family according to their size and lifestyle?
• how many rooms are there?
• how was it furnished?
• if the individual has children, where did they go to school?
• where was the individual’s place of work? Where was their spouse or civil partner’s place of work?
• where was the individual registered with a doctor/dentist?
• At which residence was the individual and their spouse, or civil partner, registered to vote?
• Which address was used for correspondence e.g.
  • banks and building societies
  • credit cards
  • utility bills
  • HMRC and other government departments.
• At which address was the individual’s car registered and insured?
• Which address was the main residence for council tax? Were there any council tax exemptions in place, such as for the dwelling-house being uninhabitable or a second residence?
• Does the utility bill usage suggest that it was occupied as the main residence of the individual and their family?

As you can see, most of these factors will require evidence. It is essential to be able to back up a claim for PRR, especially if it’s for a property that isn’t occupied most on a “time spent” basis.

This list of factors also hints at another important concept: that the quality rather than quantity of occupation is crucial to securing PRR.

 

How does a main residence election work?

A main residence election, or nomination, trumps the general rule discussed above. Instead, you specify which of the properties is to be treated as the main residence. This can be highly useful, as there is no requirement for this to be the property you spend the most time in. As long as you actually occupy the property as a home at least some of the time, you can make an election in its favour.

Remember that mere occupancy is not usually enough to meet HMRC’s criteria for status as a residence. The occupancy must have sufficient quality to constitute a home. A holiday apartment would probably therefore not count, but a residence in the country used at weekends away from a city address probably would, as in the Mohammed example.

It’s always advisable to make an election to establish one property as a main residence to secure the final nine-month deemed occupancy and to open the possibility of claiming letting relief, if the circumstances are right, in addition to PRR. Elections must be made within two years of a change in the “combination of residences”, otherwise the opportunity passes.

If you have two or more residences that can qualify for PRR it’s sensible to make an election within the two-year period even if the facts clearly indicate relief will apply to the property you wish it to. This allows you make an election to shift the main later if circumstances change. This prevent the two-year window being lost as once made the election can be varied – but no election means you have to manufacture a new two-year period.

Example

Gillian purchases her home in Letchworth for £300,000 in 2017. In September 2022 she purchases a second property in Watford for £600,000, and lives in it at weekends. By the end of 2023, the property in Letchworth is valued at £360,000. The property in Watford is worth £750,000. It is clear that the second property is increasing in value faster than the first. Gillian should make an election to ensure the Watford property is nominated as the main residence and backdate this to September 2022. She has until September 2024 to do this. It will not be necessary for Gillian to make a variation to secure the final nine months as deemed occupation, as the Letchworth property was her only residence from 2017 to 2022 and will qualify for it already.

 

What if I’ve missed the two-year deadline?

If the two-year window for making an election has passed all is not lost as a new one opens every time there is a change in the combination of available residences. For example, when a further residence is purchased.

A less costly way to reopen an election would be to rent out one of the properties for a short period and then to reoccupy it as a residence. Because the property can’t be used as the owner’s residence while it’s let, the re-occupation counts as a change in combination of residences.

 

Is the election made in a specific format?

There is no formal requirement regarding the form of the election in the legislation. However, HMRC requires a signature so it’s advisable to make the election in writing. The signature has to be yours - you can’t get your accountant to sign it for you.

Note that spouses or civil partners who are living together can only have one main residence between them. If an election affects both of them, they should both sign it.