ATXP6 UK
Syllabus A2. Chargeable gains A2a. Gains and losses on the disposal of movable and immovable property

A2a. Principal private residence relief

Syllabus A2a)

C3 Gains and losses on the disposal of movable and immovable property

Principal Private Residence Relief

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 18 months - if the property was the individuals main residence at some point in time.

    For example An individual purchased a house on 31/03/2002, he lived in it for 2 months and then travelled the world, living in hotels until he sold it on 31/03/2019.

    The last 18 months of ownership of the house, from 01/10/2017-31/03/2019 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 31/03/2002, 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 31/03/2019.

    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 31/03/2002, 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 31/03/2019.

    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 31/03/2002, he lived in it for 2 months and then travelled the world until 31/03/2005, he then moved back to the house and lived in it until he sold it on 31/03/2019. 

    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 2018, Jane sold a house for £400,000.

The house had been purchased on 1 October 1998 for £167,500.

Jane occupied the house as her main residence from the date of purchase until 31 March 2002.

The house was then unoccupied between 1 April 2002 and 31 December 2005 due to Jane moving to Chicago for work.

From 1 January 2006 until 31 December 2012, Jane again occupied the house as her main residence.

The house was then unoccupied until it was sold on 30 September 2018.

What capital gain arises on this sale?

Solution

Principal private residence exemption £183,093 (232,500 x 189/240).

The total period of ownership of the house is 240 months (189 + 51), of which 189 months qualify for exemption as follows because the unoccupied period from 1 January 2013 to 31 March 2017 is not a period of deemed occupation because it was not followed by a period of actual occupation.

£
Disposal proceeds 400,000
Acquisition cost (167,500)
232,500
PPR Exemption  (183,093)
Capital gain 49,407
Exempt months Chargeable months 
1 October 1998 to 31 March 2002 (occupied) 42
1 April 2002 to 31 December 2005 (working overseas) 45
1 January 2006 to 31 December 2012 (occupied) 84
1 January 2013 to 31 March 2017 (unoccupied) 51
1 April 2017 to 30 September 2018 (final 18 months) 18
189 51

Illustration:

Dolly bought a house on 1 April 1989 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 2018 for £150,000.

Calculate the chargeable gain arising.

Solution:

The total period of ownership of the house is 357 months, out of which 219 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 219/357 * £140,000 = £85,882

Disposal proceeds 150,000
Less cost (10,000)
Capital Gain 140,000
Less PPR relief (W1) (85,882)
Chargeable Gain 54,118
(W1) Actual & Deemed Occupation (months) Absent (months)
(actual) 3
(working overseas) 24
(actual) 174
4 years work in UK 48
Living elsewhere 108 - 18 = 90
Last 18 months 18
219 138

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 2018, Henry sold a house for £155,000.

The house had been purchased on 1 October 2009 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

£
Disposal proceeds 155,000
Acquisition cost (100,000)
PPR exemption (44,000)
Capital gain 11,000

Letting relief

If an individual lives in a property as their main residence and lets all or part of the residence for residential purposes; 

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:

Candy bought a house on 1 April 1989 for £30,000 and occupied as follows:
1/4/1989 – 31/3/1991 lived in it
1/4/1991 – 30/9/1996 travels the world and lets the house
1/10/1996 – 31/3/2006 lived in it
1/4/2006 – 31/3/2019 Moved out of the house to live with her children and the property was empty.

Candy sold the house on 31 March 2019 for £250,000.

Solution:

Disposal proceeds 250,000
Less cost (30,000)
Capital Gain 220,000
Less PPR relief (W1) (117,333)
102,667
Less Letting relief (W2) (18,333)
Chargeable Gain 84,334
(W1) Actual & Deemed Occupation (months) Absent (months)
1/4/1989 – 31/3/1991 (actual) 24
1/4/1991 – 30/9/1996 (Any reason) 36 30 (house let)
1/10/1996– 31/3/2006 (actual) 114
1/4/2006 – 31/3/2019 (empty and last 18 months) 18 138
192 168 360

PPR relief  192/360=× 220,000 = 117,333

(W2) 
(i) PPR relief figure £117,333

(ii) £40,000

(iii) Gain in the let period not covered by PPR relief 30/360× 220,000 = 18,333