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Private or Main Residence Relief – What You Need to Know!

Private or Main Residence Relief – What You Need to Know!
This is the first in a series of articles designed to give readers a broad understanding of this valuable capital gains tax relief, (“PRR”), and how and when it can be applied. While many property investors may not have an immediate use for PRR, there are many more who might – or even better, could spot an opportunity to utilise this relief to their advantage, having read these articles. As with previous series, the articles are intended to take readers from the very basics through to a useful appreciation of the relief and how it can be applied.
What does private residence relief do?
Property prices have been broadly level for the last few years but in the period of roughly ten years prior to that many houses trebled in value, and It would clearly be unfair for someone to suffer capital gains tax (CGT) on the uplift in value by comparison against those historic values, if and when they come to move house. (Having said that, following the abolition of Taper Relief for CGT purposes from 2008, most other assets held by individuals are now exposed to tax on simple price inflation).
The basic aim of Private Residence Relief, (also known as Principal Private Residence Relief or Main Residence Relief), is to ensure that people are not caught by a CGT charge when they sell their home.  It is probably fair to say that the majority of homeowners mistakenly assume that the sale of their homes is exempt from CGT and it is important to recognise that, without this relief, the gain would in fact be taxable. There is no “exemption” as such although the relief, if available, generally serves to reduce any chargeable gain to nil.
Sting in the tail...
Although it is rarely seen in practice, one unfortunate consequence of becoming ‘accidentally’ eligible for PRR is that any loss on a disposal of the qualifying main residence is not an allowable loss, if a gain would have been relieved by the PRR.
Basic restrictions
There are important restrictions to this general rule, such as the effects of:
•intervening periods of absence;
•ownership prior to (or following) occupation as the main residence;
•letting the property out; or
•use in a business.
Each of these (or a combination) can serve to restrict the benefit of the relief, although the rules often allow some flexibility, as we’ll see later.
Intention counts
There is also a further exception, which is that a property acquired wholly or partly for the purpose of making a gain on its disposal is not relieved. The restriction also applies when a residence is subsequently developed in order to make a gain. Given that most people would expect or at least hope to make some gain on the disposal of their property – particularly after ‘doing it up’ – then, interpreted strictly, this could be quite problematic and might even put something of a dent in the continual stream of home improvement programmes.
Fortunately HM Revenue & Customs (HMRC) has adopted a pragmatic approach and as per their Capital Gains Manual (at CG65210):
“...It would be unreasonable and restrictive to apply the legislation in this way. The subsection should only be taken to apply when the primary purpose of the acquisition, or of the expenditure, was an early disposal at a profit.”
One at a time – in theory...
The relief is basically only available in respect of the main residence so that, in theory, the relief is not intended to apply to several properties at once. Notwithstanding that, there is scope within the rules to benefit from overlapping periods of relief – and there is much planning that orients around this part of the regulations.  Also, where there is more than one residence, there may be opportunities to benefit from the flexibility available as to deciding which property is in fact the main residence at a particular time.
So what is a “residence”?
The legislation does not define a “residence” in this context, so it is open to interpretation and it seems that the courts have accepted the word’s dictionary definition.
There are in fact two separate sections in HMRC’s manual about the meaning of residence: in previous Tax Insider publications we have often warned that the manuals are only HMRC’s position and not the final word, and here is an example of where HMRC first says what they it thinks, and then grudgingly reports what judges have actually decided.
The first (at CG64427) is HMRC’s position on the meaning of “residence”, and says it is “...the dwelling in which the person habitually lives...” and it would be easy to infer from that statement that there can be only one such residence at any given time.
The next section (at CG64435) goes on to discuss ‘judicial interpretation’ of the definition and includes, “...a residence is a place where somebody lives...”, and “...even occasional and short residence in a place can make that a residence”. Courts and tribunals have often been more disposed to accept that a property fulfils the definition of “a residence” where HMRC has not.
Actual occupation is critical...
One area in which the courts have more frequently decided in favour of HMRC is that, in order for a property to be eligible, it must generally at some point have been physically occupied by the claimant, as his or her residence, in the period of ownership.
This might seem straightforward but simple occupation is not enough: the quality of the occupation must be adequate for it to be a residence. However, the length of the period of actual occupation is not necessarily critical, provided that the individual can demonstrate that the occupation was intended to be more than just temporary.
...Except when it’s not!
There are some rare cases where actual physical occupation as a residence is not necessary to establish a valid claim for PRR. These orient around “job-related accommodation” which is carefully defined, and applies in circumstances where someone is provided with accommodation for the proper performance of the duties of the post, or similar. Practically speaking, the role has to be very closely linked to a particular location, such as with a manager living over a public house, a minister of religion living in a vicarage, etc.
In those cases, the individual can acquire another property and, provided he or she can demonstrate an intention to occupy it as a residence in future, it may be treated as the main residence if desired (and notified to HMRC) – even if that intention subsequently changes and the property is sold without ever having been occupied.
Practical Tip :
Private Residence Relief is potentially very useful to people who own more than one residential property; renting a property out doesn’t necessarily preclude the relief (for which see later).
However, an appreciation of the relevant rules, and strategic planning, are essential to ensure that the relief is secured – and as we’ll also see later on, keeping documentary evidence of having occupied a property as a residence can be absolutely vital to a successful claim.
In later articles, we’ll look at:
•When selling off part of a property (and/or grounds) may be eligible for the relief;
•A checklist for proving that a property is an eligible residence;
•The benefits of nominating the main residence, and using a power to vary the nomination;
•The effects of periods of absence from the main residence and which periods may be ignored;
•Letting part of the main residence, how lettings relief can help the claim – and its limitations; and
•Pitfalls in planning for Main Residence Relief.
Lee Sharpe
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