What’s the ‘period of ownership’ for private residence disposal?
When you dispose of a private residence and make a profit from its sale, you won’t have to pay Capital Gains Tax (CGT) on it if the property was your main residence throughout the time you owned it – known as the ‘period of ownership’.
But what exactly qualifies? How do you know whether you’re liable to pay Capital Gains Tax or not, and how do you calculate such an exemption? Let’s look at some examples, and run through the basics of Private Residence Relief for CGT.
HMRC takes couple to First-Tier Tribunal
Recently, the First-Tier Tribunal came up with a favourable interpretation of the ‘period of ownership’. The case covered a married couple who purchased and rebuilt a house over 2.5 years, who then moved in, but sold the house on 1 year later for a profit of £500,000+ per spouse.
When this couple claimed Private Residence Relief on their total gains, HMRC argued that they weren’t eligible for the full exemption, since they hadn’t lived in the house from the time it was originally purchased. The case went to a First-Tier Tribunal to decide which party was in the right.
Though HMRC might appeal the decision, the Tribunal sided with the couple. This is because the natural reading of the law is that the ‘period of ownership’ applies to the house being sold – and since the original house had been demolished, it wasn’t possible for the couple to have lived in it from when they purchased the land 2.5 years before they moved into the new finished house.
Therefore, the couple’s gains from the sale of the house a year after moving in were fully exempt.
What is Private Residence Relief?
Normally, you must pay Capital Gains Tax (CGT) on any profits you make upon disposing of:
- Your main dwelling (home) – e.g. a house, flat, fixed caravan, or houseboat
- Part of your main dwelling, or part of the garden/land attached to your home
However, you could be entitled to a full CGT exemption if you meet the following conditions:
- The dwelling has been your primary residence throughout your ‘period of ownership’
- During this, you have not been absent other than an allowed ‘period of absence’
- The garden or grounds (including buildings) aren’t larger than the permitted area
- No part of the home was used exclusively for business purposes (multi-purpose home offices won’t prevent full relief entitlement)
If you don’t meet the conditions for a full exemption, you may still be eligible for partial CGT relief., but you’ll have to complete the Capital Gains Tax summary part of your tax return. However, you won’t be entitled to any Private Residence Relief if you purposefully acquire a dwelling to make a profit on its disposal, or if you sell the garden/grounds separately to your disposal of the home.
What is the ‘period of ownership’?
For the purposes of Private Residence Relief (PRR), the ‘period of ownership’ begins when you acquire the dwelling and ends when you pass ownership of it to someone else. This period starts on the date of acquisition, or on 31st March 1982 if you acquired the dwelling before this date.
It can seem complicated, but if you sell a property that wasn’t always your main dwelling, you’ll have to split the gains to calculate the portion that’s eligible for CGT relief. This means multiplying the profit by a percentage equal to the total period of ownership (excluding the period of absence).
However, a ‘period of absence’ could still qualify for PRR under certain conditions. For example:
1) You buy a home in 1998, but due to refurbishment requirements, you cannot move in until a year later. This dwelling then remains your primary home until you decide to sell it in 2018. You’re then entitled to full Private Residence Relief.
2) You buy a home in 2000, but your employer requires you to work away from home for a few years, so you don’t return to live in it as your main residence until 2003. You remain in this primary dwelling until you sell up in 2020. You’re also entitled to full Private Residence Relief.
In any case, the absences must not last for more than 3 years in total, or your PRR eligibility will be affected. You’ll usually be allowed to count up to 24 months of non-occupation after acquisition as actual occupation if you were unable to live in the house due to building work or other alterations.
Regardless of how a property is used in the final 9 months of ownership, it should still qualify for CGT relief, as long as it was your primary dwelling before that.
How does Private Residence Relief work?
Homeowners who dispose of their main dwelling receive Private Residence Relief, meaning they don’t have to pay Capital Gains Tax on any gains made when disposing of the residence.
If you sell a secondary home that isn’t your main residence, but you did live in full-time at some point, you may be eligible for partial relief instead of the full exemption.
People with an additional dwelling that might be eligible for PRR – such as a house or flat that you use as a holiday home or rent out during your absence – need to decide which residence they want to nominate as their main home that can then be fully exempt from CGT.
They’ll have 2 years to nominate the main home that they spend the most time living in, or else HMRC will decide for them, based on voter registration, vehicle registration, and similar factors.
If a property has been your only/main residence at any point, the last 9 months of ownership will not be liable for CGT – so, if you move out of your house into a new one before selling the old one, you’ll have up to 9 months to sell the original home before it becomes liable for CGT.
Essentially, you don’t have to pay Capital Gains Tax when selling a main dwelling for any time that you spent officially living in that residence. Whether you lived in the house or not during the last 9 months, or even rented it out, you can still receive Private Residence Relief for that time.
That said, if you sell a primary residence while letting out a part of it, you’ll only be eligible for PRR on the part of the home you actually occupied.
How to calculate Private Residence Relief
Depending on your situation, this is the main formula you should follow for calculating PRR:
- Work out the period of occupation as a main residence (in months)
- Divide this number by the total period of ownership (in months)
- Multiply this by the total capital gain (in £)
Alternatively, you can multiply the total gain (£) by the percentage of ownership (%) – for example, if you only live in 70% of the property, or you have a 50/50 split with a spouse.
Need help with Capital Gains Tax on private residence disposal?
While the case mentioned earlier in this article suggests that there’s some tax-planning scope allowed for anyone with a plot of land who can build a house on it and live there before selling up to claim Private Residence Relief, it’s important to remember that First-Tier Tribunal decisions don’t set a legal precedent. You should still consult the PRR guidance provided by HMRC.
Or, if you still find the rules around periods of ownership for Private Residence Relief to be confusing, and need help calculating your Capital Gains Tax exemptions and submitting your CGT tax returns, why not hire a professional tax consultant? The experts at GBAC, Barnsley accountants, are on hand to take your call on 01226 298 298, or respond to email enquiries sent to info@gbac.co.uk.