What is Private Residence Relief?

Private Residence Relief may not sound like the most scintillating topic. But it’s well worth getting up to speed on what it is and how it could impact your sale, if you’re haven’t already. After all, it could save you a lot of money.

Here we give you the lowdown on the tax relief and bring it to life with some Private Residence Relief examples.

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If you make a profit on the sale of a property in the UK, you may need to fork out Capital Gains Tax (CGT) on it. This could be the case if you offload a buy-to-let property or a second home, for example.

But you typically don't pay the tax when you sell a property that is considered your main home. And that's because of something called ‘Private Residence Relief’.

As HMRC states: Any individual is entitled to the relief on any gain arising on the disposal of their only or main residence.

You will automatically get Private Residence Relief if all of the following apply to the home you’ve sold:

• you have one home and you’ve lived in it as your main home throughout your ownership

• you have not let part of it out (this does not include having a lodger)

• you have not used part of it solely for business purposes

• the grounds, including all buildings, are less than 5,000 sq m (just over an acre) in total

• you did not purchase the property with the sole aim of making a gain.

But if any of them do apply to you, you may need to pay some CGT. The good news is, you could qualify for partial relief in certain scenarios (more on which, below).

So we’ve established that you’re entitled to Private Residence Relief when you sell your main home (as long as you meet all the criteria).

You also get relief for the last nine months that you owned your home. This is the case regardless of how many homes you own or where you lived at the time.

The only ‘watch’ here is that the property has to have been your only or main residence at some point during your ownership.

What happens if you don’t meet all the criteria for Private Residence Relief? Well, it’s time to get your calculator out to work out what, if any, relief you can claim.

You’ll need to establish how much profit you made when selling your home. This is normally worked out as the difference between what you bought the property for and the price you subsequently sold it for.

That said, a market valuation may be needed sometimes. This might be if you inherited or got given the property as a gift, for example.

So, let’s say you bought your home for £350,000 and you go on to sell it for £450,000. You made a £100,000 profit from the sale.

Letting out all of your home

If you let out your home to a tenant for a period of time, you may need to fork out CGT on what is known as your ‘chargeable gain’. Simply put, this is your profit minus any Private Residence Relief that you qualify for.

Let's look at an example:

You make a £120,000 profit when you sell your home after 15 years of ownership. You lived in it for 7.5 years, and you let it out for the remaining 7.5 years.

You are eligible for Private Residence Relief for the time you lived in your home (7.5 years). And you also get relief for the last nine months that you owned it, even if you didn’t live there at the time.

So in total, you get Private Residence Relief for 8.25 years. Or in other words, 55% of the time you owned the property.

That means you don’t pay CGT on £66,000 of your profit. But you do need to pay CGT on the remaining 45%, or £54,000, of the profit.

Letting out part of your home

You’ll have to run a similar calculation if you let out part of your home to a tenant. You’ll need to work out what proportion of your home was let out and pay CGT on that chunk. You’ll then typically qualify for Private Residence Relief on the remainder.

Bear in mind that if you lived in your property at the same time as your tenant, you may be able to claim Letting Relief too.

Let's look at an example:

You let out a bedroom, which amounts to 10% of your home. You go on to make a £75,000 profit when you sell your property.

You get Private Residence Relief for 90% (£67,500) of the profit. This is the proportion of the home you lived in.

But because the remaining 10%, or £7,500, relates to a bedroom you let out, you could claim Letting Relief of £7,500. The end result? You have no CGT to pay.

Living away from your home

If you live away from your home for a period of time, you may have to pay some CGT. That said, you could take advantage of Private Residence Relief in certain situations.

Remember that you normally get Private Residence Relief for the last nine months before you sell your home.

You could also qualify for Private Residence Relief if you live away from your home for:

• any reason for periods that add up to three years

• up to four years if you move away from home for work

• any period of time if you worked outside the UK.

But take care. To qualify, you must have lived in the property both before and after, unless your employment stopped you from being able to do so.

If you own one home, you could get relief for the last 36 months of ownership if:

• you’re disabled

• you’re in long-term residential care, or

• you sold the property before 6 April 2014.

And you could get Private Residence Relief for up to the first two years that you owned the property too, if:

• it was being built, renovated or you could not sell your previous home, and

• you lived in it as your only or main home within two years of buying it.

Married couples and civil partners can only count one property as their main residence at any one time. So if you and your spouse or civil partner own two homes, you're only likely to get Private Residence Relief for one.

If you do own more than one property, you could ‘nominate’ the one you’d like to be considered your main home. This could then qualify for Private Residence Relief. You must do this within two years of owning a combination of homes.

We hope that’s given you a taste of how Private Residence Relief works. It can be a complicated area to navigate so it’s important to seek professional advice before you make any decisions.