Private Residence Relief (PRR) allows a person to sell their existing home and buy another home of similar value by protecting the proceeds of sale of the old home from Capital Gains Tax (CGT).

In most cases, no CGT is paid on any gain arising on the disposal of your home.

The main PRR rule is laid out in Section 223 Taxation of Chargeable Gains Act 1992 that says:

• Any gain in value
• Realised on the disposal
• Of any property or part of a property
• That is or was a taxpayer’s only or main residence
• During their period of ownership
• Except for all or part of the last 36 months of ownership
• Is not chargeable to capital gains tax

To understand the meaning of this section, look at the terms in more detail.

‘Gain in value’ is not simply the selling price less the buying price. Other factors are taken in to account according to Section 38 Taxation of Chargeable Gains Act 1992 are restricted to:

The purchase price or market value of the asset and the incidental costs of acquisition and disposal.

The only costs that can be claimed as incidental costs are:

• Fees, commission or remuneration paid for professional services of a surveyor, valuer, auctioneer, accountant, agent or legal adviser and costs of transfer or conveyance, including stamp duty
• Spending to improve the property reflected in the property at the time of the disposal, and any costs in establishing, preserving or defending title to, or rights over, the property.
• Advertising to find a buyer or seller
• Costs reasonably incurred in valuing or making any apportionment required for calculating the gain, including expenses in ascertaining market value where required by the Taxation of Chargeable Gains Act 1992.

‘Disposal’ means selling, transferring or gifting all or part of your interest in ownership of a property to someone else.

The disposal is when the agreement or contract between you and another party becomes unconditional – that’s not necessarily the date contracts are exchanged but the conveyance completes in England and Wales.

In Scotland, the disposal date is when a binding contract follows an exchange of missives.

“Property’ for the purposes of PRR means somewhere you live – a house, apartment or bungalow are all properties. So are static caravans and houseboats connected to mains utilities.

‘Residence’ is the place where you call home. Residence is not defined in the Taxation of Chargeable Gains Act 1992.

HM Revenue and Customs (HMRC) say they are not so concerned about the length of time a person has lived in a property but the quality of that occupation.

By that, they mean putting down a sleeping bag in a house for one night does not make it your home. Your home is where you keep personal items, where you are registered on the electoral roll, the address showing on your driving licence and bank statements.
If you’re married or in a civil partnership, a one main home per couple rule applies so you can’t have double helpings of PRR.

‘Period of ownership’ is the length of time a property is owned. PRR is only available to a property you have lived in. If you have owned the property for some time, then moved out and let to tenants, you still qualify for PRR, but only for the time you lived there plus the last 36 months of ownership.

The ‘Last 36 months of ownership’ is always exempt from CGT, whether you lived in the house or not during that period.

This is especially important to consider if you ‘let and buy’ – which means you move from your old home to a new one and let to tenants before selling.

You have PRR relief on the time you lived in the property plus the last 36 months of ownership.

‘Not chargeable to capital gains tax’ means the time you lived in the property plus the last 36 months of excluded from any CGT calculation and no tax is paid for those periods.
If the property was let, left empty or used for some other purpose other than in all or part, you may have to work out if any CGT is due for that period. These fractional calculations are looked at in a lot more detail further on.

Putting yourself in the tax man’s shoes

HM Revenue and Customs (HMRC) publishes guidance for tax inspectors giving them a step-by-step guide of points to prove for applying CGT to property sales and disposals.

So what’s the point of knowing that?

Well, if you think your case is contentious, it makes good sense to cover all the bases before a tax inspector looks at your tax returns with a view to whether you‘re a case he should investigate in attempt to charge you more tax, then you’re less likely to have problems.

Here are the steps tax inspectors follow and why, taken from their internal HMRC guidance:

Is the property a home?

First step is to see if the property is a building that is capable of living in as a home

Have you really lived there?

HMRC keeps a ‘private’ file on taxpayers linked in to official databases like electoral rolls and employment records. If you are claiming a property was your home, the tax inspector will cross-reference these files.

Did you live in all or only part of the property?

If only part of the property was your home, then you are not entitled to PRR on the rest of the property

What length of time does PRR apply?

How long did you own the property – and for how long did you live there?

How large are the house, gardens or grounds?

This can be checked with the Land Registry, a visit from an HMRC valuer or an examination of the title documents.

Does the whole property qualify for PRR?

The ‘permitted area’ is gardens of grounds of up to 0.5 hectares.
If your grounds are more extensive, PRR may not apply to the land or buildings outside the permitted area

Who owns the property?

The tax inspector will look to see if you actually own the property or whether someone else has a financial interest and whether any CGT is due from him or her.

Have the owners separated or divorced?

Any of these personal factors can affect ownership and PRR, so the tax inspector will check marriage registers and court records.

Was the property really a home or a development project?

If you are quickly climbing the property ladder by moving in to a house, refurbishing and moving on to make a profit, you are not entitled to PRR.

Is there PRR on any settled property?

‘Settled property’ is generally property held in trust and special CGT rules apply.

Do ‘dependent relative’ rules apply?

If a ‘dependent relative’ moved in to a you owned property before April 6, 1988, PRR may be available.

Check the PRR claim is accurately calculated

Once the tax inspector is satisfied with your PRR claim meets all the above criteria, he will calculate your PRR relief himself and then crosscheck his figures with your claim.