Principal Private Residence

The UK capital gains tax legislation includes a relief in respect of capital gains on the sale of a person’s principal private residence, this being the main home where a person lives. The principal private residence is not a chargeable asset for capital gains tax purposes so no capital gain or loss can arise for tax purposes when it is disposed of. However as relief applies only to the main residence where a person has lived and not to any residential property owned, there are various conditions and limitations as to when the relief applies and how much relief is given.

The main requirement is that the individual must occupy the property as the main residence, and a charge to tax can arise when a person has not occupied the property as a residence throughout the period of ownership of the property, or where not all the property has been used by the individual as the main home, for example where part of the property was let. Where a property is only used as a temporary residence it is unlikely that relief will be given.

A taxpayer is only considered to have one principal private residence at a time, so where an individual has been living in more than one property it is necessary to make an election to determine which property is to be regarded as the principal private residence. The election has to be made less than two years after the date from which it is intended to apply. It is legally possible to designate a second home as the principal private residence with a view to later selling it and obtaining capital gains tax relief on the sale, but always subject to the condition that the taxpayer must have lived in it for some time and that only one home can be the nominated as the principal private residence.

The principal private residence relief applies to the house itself and to the garden up to a limit of half a hectare (just over one acre, or 5,000 square metres). A larger garden may be included in the exemption if it is in keeping with the size of the house (a provision that has led to some interesting legal disputes).

Where a person is required to live away from home because of a requirement to live in job-related accommodation, the principal private residence relief extends to the property where the person intends to live in the future, after leaving the job related accommodation.

Where a property has been occupied by the taxpayer for only part of the time of ownership, a part of the capital gain on disposal will be exempt and a part may be subject to capital gains tax. To arrive at the exempt proportion of the gain, the period of occupation is divided by the length of the period of ownership and this fraction applied to the capital gain.

Where a residence has at some time been occupied by the taxpayer, the last thirty-six months of ownership are always regarded as a period of residence, even if the taxpayer is not actually resident in the house during that period.  This concession is intended to cover the situation where the taxpayer has acquired a new house to live in but is having difficulty in selling the former residence. Even if the new property is the main residence in the period, this concession still applies.

There are other periods of ownership of a house that are deemed to be periods of residence by the taxpayer even though the person may be absent during those periods. These periods of deemed residence apply if the taxpayer was resident in the house at some point both before and after the period of absence, and if no other residence is claimed as the principal private residence during the periods of absence. The periods of deemed residence are:

Periods when the taxpayer is absent working abroad; Up to four years where the taxpayer is absent working in another part of the UK; and An absence of up to three years for any other reason.

If the terms of a taxpayer’s employment prevent a return to the residence, the requirement that the taxpayer must live in it after an absence for employment is waived.

There is also a capital gains tax relief that applies in a situation where the residence has been let to tenants (as residential accommodation) during the period of ownership, either while the owner was absent from the property or by letting part of the property while the owner lived in another part. The letting relief is computed as the lower of:

The gain relating to the let part of the property (or to a period where the whole property was let); The gain that is exempt because of the principal private residence exemption; or £40,000.

The letting relief will normally not be available if the part of the premises let out by the taxpayer is a separate dwelling from the taxpayer’s accommodation, for example a self-contained flat.

The capital gains tax relief for the person’s main home is very extensive but the taxpayer may need to plan carefully to ensure that all available relief is obtained. A taxpayer who has more than one house may need to consider making an election for one property to be the main residence and the consequences of this election need to be thought out in detail.


HM Revenue and Customs

“Taxation” by Alan Melville, fifteenth edition 2010, FT Prentice Hall