It is generally well known amongst the tax paying public that capital gains arising on the disposal of their principal private residence, subject to meeting the detailed conditions for claiming this relief, is covered by principal private residence relief.
Whilst in principle the rules seem quite simple, there have been many changes to the rules, particularly since April 2020, and many common misconceptions.
This article seeks to highlight some of these matters.
The capital gain calculation on the disposal of a private residence is computed based on the entire ownership of the tax payer. It is only the period when the property has been occupied as the tax payer’s principal private residence and a few exemptions such as the last 9 months of ownership that qualify for this valuable relief. There is a common misconception that as long as the property has been occupied as the tax payer’s principal private residence at some point during its ownership then the entire gain is covered by the relief. This is simply not the case and scuppers the often
ill- conceived notion of simply moving into a property for a period before sale secures this valuable relief.
This is best illustrated by example. A property acquired January 2016 was lived in by the tax payer as their main residence until January 2019 and then moved out and let for two years until the property was sold in January 2021. Assuming in this case the property cost £150,000 and was sold for £200,000, we have a potential gain of £50,000. The period occupied from January 2016 to January 2019 as the principal private residence, ie 3 years, will qualify for PPR. In addition, the 9 months up to the date of the disposal in January 2021 will also qualify for PPR as property has at some point been the tax payer’s PPR. In this case the gain chargeable is calculated as follows:
Total months of ownership 60 months
PPR relief - 36 months plus 9, i.e. 45 months, i.e. PPR relief £50,000 x 45/60 = £37,500
Actual capital gain assessable £12,500
Of course each tax year there is an annual capital gain exemption which could, dependent on the individual’s circumstances, further reduce the gain assessable.
The above example also highlights another change in April 2020 in that formerly there used to be further relief known as letting relief which would reduce capital gain computations in such a scenario by the higher of £40,000 or the amount of PPR relief secured. Unfortunately from 6 April 2020, letting relief is only available for periods when the tax payer has shared occupancy with tenants, i.e. a lodger type scenario.
In addition, from 6 April 2020 there is a new 30 day reporting requirement in relation to the disposal of UK residential property. There is an online declaration of the capital gain computation and any resultant capital gains tax due must also be paid within 30 days of completion of the property sale transaction.
As outlined above, the computation with regard to capital gains on the disposal of property can be complex particularly where the property has had a historic mixed use history or doesn’t automatically meet the eligibility criteria and in such cases further specific advice should be sought.