Principal Private Residence Relief (PPR relief) lets people sell their homes without having to pay capital gains tax on the money they make. If you sell a second home or part of your yard, it may also help you pay less in capital gains tax.
People who own more than one home, whether in the UK or another country, have a lot of tax problems to think about when it comes to the possible capital gains tax when they sell any of those homes. If you plan ahead in this case, you can greatly reduce the amount of capital gains tax you have to pay. 28%, but that rate drops to 18% if the taxpayer’s taxable gain is less than the basic rate band for income tax.
What is a Qualifying Private Residence?
Finding out if a property is a home that might be eligible for capital gains tax main private residence relief is the first thing that needs to be done. This kind of house is a building that a person lives in as a home and plans to stay in for a while. Relief can never be used for homes that taxpayers only rent to other people. Except in very limited cases where the taxpayer has to live in a working space, like when they are a clergyman or an army officer.
The job doesn’t have to be continuous, and you can have more than one qualified residence open at any given time. The person doesn’t have to exactly own the home; a property that a taxpayer rents will count as a residence of that taxpayer. Some people have trouble getting capital gains tax breaks if they use the house as their home.
There are times when long-term non-occupation is not counted (as long as there is no other qualifying residence at the same time). This includes times when the taxpayer lives in housing linked to their job (for up to four years), works overseas (for an unlimited amount of time), or for any other reason (for up to three years). Short-term breaks from work, like vacations, are also being pushed to the side. It doesn’t matter if the home was occupied during the last thirty-six months of control. If the homeowner has been eligible for relief at some point in the past, they will always be eligible for relief for those years.
Quick profit
If someone buys a house with the plan to fix it up and sell it quickly for a profit, HMRC may try to deny main private residence relief. This is because the property wasn’t meant to be used as a permanent home, even if the person moved in while it was being renovated. Though you could move into a house while it’s on the market for sale, it probably won’t become your permanent home. HMRC could try to tax these kinds of gains as income instead of capital gains, but this is not likely to happen when a house is sold or renovated. When someone buys, fixes up, and sells a lot of properties in a row, they will almost certainly have to pay income tax and Class 2/4 National Insurance payments. Especially when these kinds of deals are made by people who work in the construction business.
More Than One Residence
Based on what was said above, it is possible to have more than one private home at the same time. A vacation home (as long as it’s used as a home sometimes) or a home close to where you work that utilizes another home elsewhere for the rest of the family during the week are clear examples of this.
As soon as it is known that more than one residence meets the requirements, it is time to find the residence that is eligible for main private residence relief. The main private residence relief can only be used for one home at a time. Unless that residence was the taxpayer’s main private residence at some point in the last 36 months, relief is automatically available. This is the case even if the taxpayer owned another residence that qualified for relief during that time.
When a husband and wife (or civil partner) live together, they can only have one qualifying home. Based on the details of the case, if there is no election, relief moves to the principal (main) residence. As there would be another main home, relief is not likely to be a feature of a vacation home. A home close to work probably won’t help with stress relief either if the person lives there with their family during the week and only comes home on weekends and vacations.
Electing to Designate the Principal Residence
It’s possible that the default main private residence is not the best choice for your taxes, especially if you rent that home. In some cases, you can choose a different principal residence. There can only be an election every two years after something changes. Most of the time, a change in circumstances means that a person owns more or fewer homes. But keep in mind that going from two homes to one is not a change that matters. An election is legal as long as nothing else changes after it has happened. It can be run again at any time. (at which point the election is nullified immediately, and things go back to how they were before the election)
You might want to choose (if you haven’t already) to make the home that won’t otherwise qualify for principal private residence relief the elected principal residence when you buy a new home (or sell an existing home within two years of buying a new one) or when you sell an existing home as long as you still have at least two homes. Then, soon after (say, a month later), the election can be changed to make the original home the elected primary residence again. After making this choice, any gain on the second home will not be subject to capital gains tax for one month and for the last three years. However, the main home will lose its tax break for one month.
The HMRC advice on this approach, which can be found under reference CG64510, gives an example of how to do it. Here it is for your attention:
If a taxpayer who is not domiciled in the UK lives outside of the UK, they need to be careful with any election or default stance. Any gain from the foreign home may not be taxed in the UK if the remittance base is used.
People who want to vote must put their choice in writing, sign it, and send it to their own tax area. Just because HMRC says they have received an election doesn’t mean that it has been accepted as valid. It’s just a confirmation that the election was received; it will only be looked at again if taxes are at stake.
Transfers between married people and civil partners who live together do not change the number of homes. These things can’t be used to make the conditions needed for an election to happen. But there are times when a move between spouses or civil partners can be helpful. In this case, the rules are complicated, and each person needs advice that is tailored to their particular situation.
A major consideration as to whether or not to make an election is:
the value of each home could go up in the future.
How much each home is likely to go up in value and whether any of them are likely to sell soon, preferably in the next three years.
Lettings relief
Once a home is designated as a main private residence, even if only for a short time through an election as described above, a supplement relief is available to exempt certain gains (up to £40,000 per taxpayer) related to times when the property was let out either partially while being occupied or fully during a time when the owner wasn’t living there.
