Principal Private Residence (PPR) relief is the most significant relief from Capital Gains Tax (CGT) on the sale of interests in property. The relief applies to exempt any gain accruing on the disposal of a dwelling-house which has been an individual's only or main residence. Although the application of this relief is straightforward in the majority of cases, it can raise complications and opportunities in cases where an individual has more than one property.
The general exemption
The exemption applies to either the whole, or a fraction of, the gain attributable to the disposal of a dwelling-house, or part of a dwelling-house which is, or has at any time in the individual's period of ownership been his only or main residence. The exemption also extends to the garden or grounds held for the individual's own occupation and enjoyment with that residence.
Total exemption will apply to a gain if the residence (or part of the residence) has been the individual's only or main residence throughout the period of ownership.
Fractional exemption will apply where the total exemption does not apply to a gain. When calculating the proportion of the gain that is exempt, the total gain is multiplied by the periods of ownership during which the residence (or part of the residence) was the individual's only or main residence (including the final 36 months of ownership regardless of occupation), divided by the total period of ownership. The period of ownership begins on the date that the residence was first acquired or on 31 March 1982 if that is later.
An individual may only have one main residence at any given time. Spouses or civil partners, when living together, may only have one main residence jointly.
Although there is no definition in the legislation of what constitutes a dwelling-house, the term dwelling-house will include a flat as well as a house. It is also likely to include a garage which comes with the flat or house.
The exemption also applies to land which the individual (or couple) has for his own "occupation and enjoyment" with the residence as its garden or grounds up to the basic permitted area of 0.5 hectares (5,000 sq. metres). However, if the garden or grounds are larger than that, the tax legislation extends the exemption to "such larger area as is required for the reasonable enjoyment of the dwelling-house as a residence, taking into account the size and character of the dwelling-house".
Periods of ownership qualifying for exemption
The last 36 months' of ownership will always be exempt from the charge to CGT, providing the dwelling has been the main residence at some earlier point. The individual should ensure that he takes up residence as soon as he acquires an interest in the property. However, relief will normally be given where, for up to the first 12 months of ownership, the individual has not resided in the property in one of two circumstances:
- Where he buys the land and has a house constructed on it; or
- Where he buys an existing house and prior to moving in, either arranges for alteration or redecoration or completes the disposal of his previous residence.
This 12 month period may be extended for up to a further 12 months if there are good reasons for exceptional delay.
PPR relief is also not necessarily prejudiced if the individual does not occupy the property as his only or main residence throughout his period of ownership (ignoring the last 36 months). The following specified periods of absence are treated as if, during these periods, the property was the individual's only or main residence:
- A period or periods not exceeding in total three years;
- Any period throughout which the individual was employed outside the UK; and
- Any period or periods not exceeding in total four years throughout which the individual could not reside in the property in consequence either of the situation of his place of work or of any condition imposed by his employer requiring him to reside elsewhere.
Acquiring a second home
When an individual (or couple) acquires a second property and at some point uses both as a home, he may make an election to nominate one to be treated as his main residence for tax purposes. Such an election is important to achieve maximum tax relief on a later sale of one or both of the properties. Once the election has been made, it may subsequently be varied to assist in tax planning at a relevant point in the future.
In order to obtain PPR on the disposal of a property, the individual must be able to demonstrate that he actually resides in that property and does not simply own it and he must establish that he intended to make the property his residence. Advice should be taken in this regard.
Where PPR relief is reduced because the qualifying dwelling (or any part of it) has at any time in the period of ownership been wholly or partly let by the individual as residential accommodation, additional relief may be available to reduce the chargeable gain. The part of the gain which would be a chargeable gain by reason of the letting will be chargeable only to the extent to which it exceeds the lesser of:
- Ł40,000; or
- The amount of the gain that qualifies for PPR relief.
PPR relief is available to extinguish the gain on an individual's only or main residence.
For individuals owning more than one home, there are tax advantages in making sure that timely elections are made to maximise PPR relief across all properties. However, before making any such elections we would recommend that appropriate professional advice is taken.
This document has been prepared as a general guide and. Whilst every care has been taken in its preparation, Verfides cannot accept any responsibility for any person relying on this publication. Professional advice should be obtained before undertaking transactions and Verfides will be pleased to provide such advice where appropriate.