ACCA TX ^UK Syllabus C. Chargable Gains For Individuals - Principal private residence relief - Notes ^{2 / 2}

What is it?

Simply, don't pay any tax if you sell your house.

• But you will have to if you didn't live there all the time or used it for business purposes.

How much capital gain is exempt with PPR Relief?

• FULL exemption

  If you occupied the property throughout the entire period of ownership.

• Partial exemption

  If you stay there only for part of the period.

  This is calculated as:

  Capital gain * Period of occupation/Period of ownership

There are however periods of absence which are deemed to be full occupation

1. Last 9 months - if the property was the individuals main residence at some point in time.

   For example An individual purchased a house on 31/03/2006, he lived in it for 2 months and then travelled the world, living in hotels until he sold it on 31/03/2025.

   The last 9 months of ownership of the house, from 01/07/2024-31/03/2025 will be considered to be occupied by the individual, even though he did not live there at the time.

2. Any periods during which the individual was required by his employment to live abroad. 

   The person must come back to live in the house after this period in order for this time to be considered to be deemed occupation. 

   For example An individual purchased a house in London on 31/03/2006, he lived in it for 2 months and then moved to Barbados for employment for 4 years, he then returned to live in the house until he sold it on 31/03/2025.

   For capital gains tax purposes the 4 years during which the individual lived abroad will be considered to be deemed occupation by the individual. 

   This is because the reason for living abroad was employment purposes and he moved back to the house when he returned.

3. Any period up to four years during which the individual is required to live elsewhere in the UK due to employment. 

   The person must come back to live in the house after this period in order for this time to be considered to be deemed occupation.

   For example An individual purchased a house in London on 31/03/2006, he lived in it for 2 months and then moved to Newcastle for employment for 4 years, he then returned to live in the house until he sold it on 31/03/2025.

   For capital gains tax purposes the 4 years during which the individual lived elsewhere in the UK will be considered to be deemed occupation by the individual.

   This is because the reason for living elsewhere in the UK was employment purposes and it was for 4 years only, and he moved back to the house when he returned.

4. Up to three years for any reason.

   The person must come back to live in the house after this period in order for this time to be considered to be deemed occupation.

   For example An individual purchased a house on 31/03/2006, he lived in it for 2 months and then travelled the world until 31/03/2009, he then moved back to the house and lived in it until he sold it on 31/03/2025. 

   For capital gains tax purposes the 3 years during which the individual was travelling will be considered to be deemed occupation by the individual. 

   This is because the reason up to 3 years for any reason is allowable and he lived in the house when he returned.

For points 2 and 3, where an individual is not living in their main residence due to work, if they do not return to their house to live in it after because of another work engagement immediately after the first one, this will still be considered deemed occupation.

Illustration

On 30 September 2024, Jane sold a house for £400,000.

The house had been purchased on 1 October 2004 for £167,500.

Jane occupied the house as her main residence from the date of purchase until 31 March 2008.

The house was then unoccupied between 1 April 2008 and 31 December 2011 due to Jane moving to Chicago for work.

From 1 January 2012 until 31 December 2018, Jane again occupied the house as her main residence.

The house was then unoccupied until it was sold on 30 September 2024.

What capital gain arises on this sale?

Solution

Principal private residence exemption £174,375 (232,500 x 180/240).

The total period of ownership of the house is 240 months (180 + 60), of which 180 months qualify for exemption as follows because the unoccupied period from 1 January 2019 to 31 December 2023 is not a period of deemed occupation because it was not followed by a period of actual occupation.

Illustration:

Dolly bought a house on 1 April 1995 for £10,000.

She lived in it for 3 months. 

Then she worked abroad for 24 months.

She came back and lived in the house for another 174 months.

Then she lived and worked elsewhere in UK for 48 months. 

Dolly never returned to the house and and it was sold 108 months later in December 2024 for £150,000.

Calculate the chargeable gain arising.

Solution:

The total period of ownership of the house is 357 months, out of which 210 months qualify for the PPR exemption.

The 4 years of working elsewhere in the UK cannot be classified as deemed occupation because she never returned to the house to live in it after that. 

The exemption is 210/357 * £140,000 = £82,353

Business use

Where part of a residence is used exclusively for business purposes throughout the period of ownership, the gain in relation to that part is not covered by relief.

Illustration

On 30 September 2024, Henry sold a house for £155,000.

The house had been purchased on 1 October 2013 for £100,000.

Throughout the period of ownership, the house was occupied by Henry as his main residence, but one of the house’s five rooms was always used as Henry's office premises. 

What capital gain arises on this disposal?

Solution

The principal private residence exemption is restricted to £44,000 (55,000 x 4/5).

This is because 1 out of 5 rooms of the house has always been used only for business purposes. 

The capital gain arising on the sale is £11,000

Letting relief

If an individual lives in a property as their main residence and and while living in the main residence, they let all or part of the residence for residential purposes, while they are living in the house;

on the disposal of this property, in addition to claiming PPR relief, the letting relief is also available to reduce the capital gain.

This relief is the lower of:

• PPR relief given

• £40,000

• Gain attributable to letting

Illustration:

Susan purchased a house for £200,000 in 2000 and sold it for £350,000 in 2024. 

Throughout this time, she lived in the house as her only residence but let out two spare rooms amounting to 25% of the property to tenants who had exclusive use of their rooms. 

What is the chargeable gain after the PPR exemption and letting relief exemption?

Solution:

Sale proceeds £350,000
Less cost (£200,000)
Chargeable gain £150,000

PPR (£112,500)

Letting (£37,500)

Chargeable gain £Nil

Explanation:

Susan made a chargeable gain of £150,000 when she sold the property.

She is entitled to claim PPR on 75% of the gain (75% x £150,000 = £112,500)

She will qualify for letting relief as she is sharing occupation of the property with her tenants.

Gain attributable to the letting is £150,000 x 25% = £37,500.

(W1) Letting relief is the lower of:

(i) PPR relief figure £112,500
(ii) £40,000
(iii) Gain attributable to letting £37,500