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CGT can be levied on residential property gains at rates of 18% or 24%, depending on income levels, and any tax arising will be payable within 60 days of the sale. However, if the property sold is your main residence then a relief called Private Residence Relief (‘PRR’) may apply to exempt all (or part) of this gain from tax.
For these purposes, the property will be a dwelling house and will include adjoining buildings, such as garages. It will also include land surrounding the house, provided that this land does not exceed 0.5 hectares. HMRC may allow relief on a larger area of surrounding land if they are satisfied that the land is required for the ‘enjoyment’ of the property.
Where a property is an individual’s main residence, PRR can exempt part or all of the taxable gain. Periods of absence from the property can restrict the relief, resulting in a partial taxable gain. HMRC will allow some periods of absence to be ignored and these are referred to as period of ‘deemed occupation’; however the individual must have physically occupied the property before and after such period of absence.
The below occasions are where a period of absence can be treated as a period of deemed occupation:
Length of Absence Allowed
Reason for Absence
Two Years
If at the beginning of ownership, the individual is prevented from immediately occupying the property due to construction, renovation or redecoration
Unlimited
Working outside of the UK
Four Years
Working elsewhere in the UK
Three Years
Any reason
The last nine months of ownership will also qualify as a period of deemed occupation. The above deemed occupation periods can apply cumulatively, as long as the individual returns to the property.
HMRC may challenge the relief where they doubt that the individual lived at the property throughout the period of ownership. It is vital that the individual can prove that they actually lived in the home. There have been numerous cases where HMRC have challenged PRR. In the most recent case, Patwary v HMRC, HMRC assessed items such as the address on the electoral roll, utility bills, employment payslips and banking details to determine if individuals had indeed lived in the property which they claimed to be their home. HMRC may deny the relief where the residency ‘lacked permanence’ i.e. where the individual did not treat the property as their home.
If an individual has multiple homes in which they reside, they must nominate which home is to be their main residence. They must make this election within two years of acquiring the second home. If they cease to actually live in the nominated property, the election will lapse and this property will not qualify for relief. This nomination can be changed at any time.
Where a couple is married or in a civil partnership, the couple can only have one main residence. If both parties had their own homes prior to marriage, they should make the above election to nominate which home is their primary residence. If the other property is later sold then a gain could arise in respect of the period of ownership during which the other property was not occupied as a main residence.
Individuals who repeatedly purchase properties to renovate and sell are unlikely to be eligible for the relief, even where they have resided in the property. Instead, these sales could be charged at tax rates up to 47% because HMRC may argue that the individual is carrying on a trade of buying and selling property. HMRC will take this view where a property was purchased with the intention to sell and realise a profit on sale.
In summary, PRR will only apply to the sale of a property which has been lived in as a home, and where evidence shows there was some degree of permanence or continuity. In the absence of the relief, any gain would be charged at rates of either 18% or 24%. The tax would be due within 60 days of the sale, and the sale must be reported to HMRC via an online property return.
