If the property has ever served as your sole or primary place of residence, you may be eligible for private residence relief. This rule applies to married couples, civil partners, and unmarried individuals, as they can only designate one property as their principal private residence at any given time. Full private residence relief is typically applicable if the property has been exclusively used as your main residence, without any leasing or business activities conducted on the premises during your ownership.
It’s important to note that if you experience a capital loss on your principal private residence, you cannot offset this loss against other gains. Additionally, if the property exceeds half a hectare (approximately 1.25 acres), you must demonstrate that the additional land is necessary for the reasonable enjoyment of the property, considering its size and character, in order to qualify for the full Private Residence Relief. Otherwise, relief may be restricted.
The last 9 months of ownership are considered eligible for relief, whether or not you were physically residing on the property during that time, as long as the property has been your principal private residence at some point. However, if you are disabled or enter long-term care, the exemption extends to the final 3 years instead of 9 months. Therefore, if you vacate the property, lease it out for 9 months, and sell it at the end of this period, you will not incur any taxable gain.
A helpful tip: If you are asserting that a property is your principal private residence, be sure to inform HMRC of your change in address to avoid any discrepancies.
Owning more than one residence at a time
If you happen to own more than one residence, both of which are not rented out, you have the option to designate one of them as your principal private residence. It’s crucial to make this election within two years of acquiring the second property. Once the election is made, it can be modified as needed. However, keep in mind that both properties must be used by you as residences. For instance, if you have a primary residence and a personal holiday home, you should consider making such an election.
Starting from April 6th, 2015, a property doesn’t qualify for relief if it is located in a different territory from your primary place of residence, and you do not spend at least 90 days in that property. So, for UK residents, this rule does not apply to another property you own in the UK. Still, you would need to spend at least 90 days in your French holiday cottage during any tax year for it to be considered an elected principal private residence for that tax year.
If you do not make an election, the determination usually depends on which property you inhabit the most. When you have two properties, you can potentially save on Capital Gains Tax by carefully utilizing this election. For example, if you’re a UK resident and you purchase a holiday home in the UK, selling it nine months later without making an election could result in a Capital Gains Tax liability with no relief.
However, if you elected the holiday home as your principal private residence and then, one week later, elected your normal home to be your main residence again, you would not incur a Capital Gains Tax liability upon selling the holiday home, provided it is sold within nine months of purchase. In this scenario, your normal home would have only one week out of the total ownership period as a chargeable gain, which should be so minimal that it can be covered by your annual exemption. This approach was especially worthwhile when the final period was 36 months.
Business use of your home and lodgers
If you have a home office or study, it’s important not to use it exclusively for your business, as doing so may lead to a potential Capital Gains Tax liability. Any area within your residence that is solely dedicated to business purposes is not eligible for Private Residence Relief, and a proportionate gain from that area could be subject to taxation.
However, if you decide to rent a room in your home to a lodger, and they actively participate in communal activities such as meals and shared facilities, this arrangement will not affect your eligibility for Private Residence Relief, and there won’t be any restrictions.
On the other hand, if you choose to rent out a room but do not provide any additional services or shared amenities, a portion of your Private Residence Relief may be forfeited. Nonetheless, in such cases, you may become eligible for Lettings Relief to offset some of the potential tax implications.
Lettings Relief
Lettings relief can be claimed if the property has served as the main private residence at some point and is currently occupied by both the tenant and the landlord simultaneously. Importantly, this relief is applicable only during the period when the property is being rented out.
Job-related accommodation
If you need to reside in job-related housing for a certain duration, you can apply for principal private residence relief on a property you own during that time, as long as you originally purchased it with the intention of living there, even if you decide to rent it out. Living quarters are considered job-related when they are provided due to an individual’s employment, their spouse or civil partner’s employment, and are necessary for the effective execution of their job responsibilities, or when the accommodation is supplied as part of special security measures.
However, it’s important to note that there are anti-avoidance regulations in place to prevent directors of their own companies from claiming that accommodation is job-related.
DISCLAIMER
© Thandi Nicholls Ltd 2023 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice that takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, S S Thandi, and M S Bains cannot be held responsible for the consequences of any action or the consequences of deciding not to act.