Private residence relief (PRR) has been an important aspect of capital gains tax (CGT), since its introduction in 1965.
If a property has been used as a primary or only residence, at any time during its ownership, then PRR is designed to reduce the payment of CGT on the gains that arise as a result of its sale.
In order to qualify for PRR, there are specific occupation rules that have to be met.
Full relief is available where each of these conditions are met:
- the ‘dwelling house’ has been your ‘only’ or ‘main residence’ throughout your ‘period of ownership’
- you’ve not been absent, other than for an ‘allowed period of absence’ or because you’ve been living in ‘job-related accommodation’, during your ‘period of ownership’
- the ‘garden or grounds’ including the buildings on them are not greater than the ‘permitted area’
- no part of your home has been used exclusively for business purposes during your period of ownership.
If these conditions are not met for your full period of ownership, partial relief may still be available.
Where the property meets the criteria for PRR relief, either in full or partially, the final 18 month period of ownership (or 36 months for those with a disability or in care) always qualifies for relief, regardless of how the property was used in that time, as long as the dwelling has been your only or main residence at some point.
Furthermore, where the property partially qualifies for PRR relief, but the relief is restricted because you have let some or all of the property as residential accommodation, you may be entitled to lettings relief.
The amount of relief is the lowest of:
- the amount of Private Residence Relief already calculated
- the amount of gain relating to the let period.
However, as a result of announcements in the 2018 Budget, HMRC is currently consulting around changes to both lettings relief and the final exemption period specifically:
- Reducing the final exemption period from 18 months to 9 months. The exemption of 36 months for those with a disability or in care will not change.
- Restructuring lettings relief so that it only applies where the owner and tenant are in shared occupation.
These changes will take effect from 6 April 2020 and could significantly increase the CGT liabilities for individuals with let properties that currently qualify for PRR relief, and for those who exceed the final exemption period, perhaps due to difficulties in selling the property.