Private Residence Relief (PRR) is one of the most valuable tax reliefs available to homeowners in the UK. It can significantly reduce or even eliminate Capital Gains Tax (CGT) on the sale of your primary residence. However, understanding the rules and maximising the benefits requires careful planning and awareness of eligibility criteria.
In this blog, we’ll explore what PRR is, how it works, and strategies to make the most of this relief.
What Is Private Residence Relief?
PRR is a relief that exempts homeowners from paying CGT on the gain made when selling their primary residence. CGT is normally charged on the profit made from selling an asset that has increased in value, but PRR provides relief for homes used as your main residence during ownership.
For example:
- If you bought a house for £300,000 and sold it for £500,000, you made a £200,000 gain. With PRR, you may not owe any CGT on this amount, provided the property qualifies.
Eligibility for PRR
To qualify for PRR, several conditions must be met:
- Primary Residence Requirement
- The property must have been your main home for all or part of the ownership period.
- Ownership Period
- PRR applies only to the time when the property was your primary residence. Periods of non-residence may reduce the relief.
- Exclusions
- If you’ve rented out the property, used part of it for business purposes, or owned more than one home, PRR may not fully apply.
- Final Exemption Period
- The final 9 months of ownership are typically exempt from CGT, even if the property wasn’t your main residence during this period.
How PRR Is Calculated
PRR is calculated based on the proportion of time the property was your primary residence. For example:
- If you owned a property for 10 years and lived in it for 8, PRR applies to 80% of the gain.
- The remaining 20% is subject to CGT unless other reliefs, such as letting relief, apply.
Case Study: Part-Time Residency
Sarah owned a house for 10 years but rented it out for 4 years while living abroad. She made a £150,000 gain when selling the property.
- 6 years (60%) qualify for PRR.
- £90,000 of the gain is exempt, leaving £60,000 subject to CGT.
Maximising PRR Benefits
- Ensure Primary Residence Designation
- Clearly designate one property as your main residence if you own multiple homes.
- Utilise Letting Relief
- If you rented out your property, letting relief may reduce CGT on the portion of the gain attributed to rental periods.
- Leverage the Final Exemption Period
- Plan your sale to take advantage of the 9-month exemption, even if the property isn’t currently your main residence.
- Avoid Business Use of Property
- Using part of your home exclusively for business may reduce PRR. Consider dual-purpose use (e.g., a guest room doubling as an office).
- Seek Professional Advice
- Complex scenarios, such as part-time residency or multiple properties, benefit from expert tax planning.
Changes to PRR Over Time
The rules for PRR have evolved, with the most recent changes including:
- Reduction of the final exemption period from 18 months to 9 months.
- Stricter rules for letting relief, now applicable only if you lived in the property during the rental period.
These changes highlight the importance of staying informed about current legislation to maximise relief.
How COPA Accounting Can Help
At COPA Accounting, we specialise in property tax planning and can help you navigate PRR to minimise your tax liability. Our services include:
- PRR Eligibility Assessment
- Determine whether your property qualifies for full or partial PRR.
- CGT Planning
- Develop strategies to minimise CGT on property sales, including utilising PRR and other reliefs.
- Letting Relief Optimisation
- Maximise letting relief if your property has been rented out.
- Complex Scenarios
- Provide tailored advice for part-time residency, multiple homes, and mixed-use properties.
Case Study: Maximising PRR for a Landlord
James owned a house for 15 years, living in it for the first 10 years and renting it out for the remaining 5. He consulted COPA Accounting to reduce his CGT liability.
- PRR applied to 10 years of ownership, exempting 67% of the £180,000 gain.
- Letting relief was applied to the remaining 5 years, reducing the taxable gain further.
By combining PRR and letting relief, James reduced his CGT liability from £14,400 to just £4,800.
Conclusion
Private Residence Relief is a powerful tool for reducing CGT on property sales, but maximising its benefits requires careful planning and a thorough understanding of the rules. Whether you’re selling a primary residence or a property with mixed use, seeking professional advice can save you thousands in taxes.
At COPA Accounting, we provide expert guidance to help you navigate property taxes and maximise reliefs. Contact us today to discuss your property tax planning needs.
Learn more at COPA Accounting and make the most of your property investments!