Principal Private Residence Relief – What does it mean?

When selling a property that has served as your main residence, it’s essential to be aware of Capital Gains Tax implications and the potential tax relief that could be available to you. This relief, known as Principal Private Residence Relief (PPR), can reduce or even eliminate the taxable gain on the disposal of a property that has been your primary home for the duration of your ownership.

Paddy Harty explains the intricacies of PPR below, including qualification criteria, deemed periods of occupation, and notable exceptions which could have a significant impact on the relief claimed during the sale of a residence. Understanding these rules is key to ensuring you make the most of the PPR and avoid unforeseen tax liabilities.

PPR Relief

PPR relief reduces an individual’s taxable gain on the disposal of their main home providing the individual occupied the property for the entire period of ownership (there are some deemed periods of occupation) and was UK resident in the year of disposal.

Where an individual has not occupied the property for the entire period of ownership, a capital gain could crystallise on the gain relating to the period of non-occupation.  However, is important to note that some periods of absence could be deemed to be a period of occupation.

A deemed period of occupation could arise, if, by reason of employment,  an individual couldn’t occupy the property.  This would only apply if they lived in the property pre and post the following employment related absences, a period that the individual didn’t occupy their residence due to being abroad by reason of their employment (no time restriction) or if their employer required them to reside elsewhere, as a requirement,  to do their job effectively (4 year restriction).

There would also be a deemed period of occupation for any other period of absence (up to a maximum of 3 years) providing the owner lived in the property pre and post the period of absence.

In addition to these, the last 9 months of ownership would qualify for PPR and relief would also be available for the first 2 years of homeownership, providing the home was being built or renovated or you could not sell your own home and you lived in the property as your main residence within 2 years of owning it. There are some exceptions to the 9-month rule.  This rule does not apply to individuals who have a disability or individuals who are resident in a care home. In these specific circumstances, the last 36 months of ownership qualifies for PPR relief.

As a result of the Covid pandemic, since March 2020, how we work has changed with employees working from home and some may continue to do so for the foreseeable future.   In order to claim PPR, the property must have been occupied as a  residence.  Therefore, PPR could be restricted,  if any part of the property was used exclusively for the purposes of a  trade, business,  profession, or vocation, then PPR. It is important to note that any room that has a mixed-use and not exclusively used for businesses purposes could  still be covered by PPR.  However, if a deduction has been claimed for working from home, this could have an impact on any claim for PPR.

During the Covid pandemic, travel restrictions were also implemented which restricted the movement of people.  This could impact on the residency status for some individuals.  In order to claim PPR, the individual disposing of the property must by UK resident.  Therefore,  some individuals may not satisfy the UK residency test and would not be eligible to claim PPR on any disposal of UK property.

Prior to the 6 April 2020,  the final period of ownership that qualified for PPR was 18 months.   As a result, some home owners who may have had property sales delayed due to the Covid-19 pandemic, which are now taking place in the 2021 tax year, could face a tax liability that they may not be aware of due to the reduction in the last period of ownership from 18 months to 9 months.

It is important that any individual disposing of a property, should review, the specific facts in respect to the disposal, assess if Covid-19 could impact on the disposal and calculate the associated gain to ensure no hidden “COVID” tax cost.