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  • Principal private residence – don’t fall into a money pit!

    30 July 2020

    Thomas Slipanczewski

    As many will be aware, the purchase of a main residence is often the single largest expense you are likely to encounter. As such, the hope is that on any future sale of the property the value has increased from the date of purchase.

    What are those rules?

    1. Actual occupation

    The word “residence” is not defined in the legislation and so must be given its ordinary meaning. A person’s residence is the dwelling in which they habitually live, in other words their home. There is no minimum period of occupation which establishes a property as a residence so each case must be decided upon its own particular facts.

    HMRC will consider the quality of the taxpayer’s occupation of the property. Usual matters for consideration for HMRC are: –

    • Producing documentary evidence of residence during that period, such as receipts for utilities, home insurance documentation or telephone bills
    • Sleeping and eating at the property
    • Forming a genuine sense that residency will be permanent when the property is purchased

    2. Deemed Occupation

    Certain periods of absence can be treated as occupation. It is very important to note that a period of absence can only be treated as a period of deemed occupation if it was both preceded and followed by a period of actual, physical occupation.

    Therefore if a taxpayer purchases a property, lives in it for a while then moves out, we can only count the period of absence as a period of occupation if the taxpayer returns to the property and lives in the house before he sells it.

    The legislation is very specific as to which periods of absence can count as deemed occupation. There are three periods of absence that will qualify: –

    1. Where the owner is abroad by reason of his employment, that period of absence can be treated as a period of deemed occupation. This period is unlimited.
    2. Where the owner was absent from the property due to working elsewhere – either as an employee or as a self-employed trader – that period of absence will also qualify as deemed occupation. Here the period of deemed occupation is limited to a maximum of four years.
    3. Finally, any period of absence up to a maximum of three years will qualify as a period of deemed occupation.

    These three periods of deemed occupation can apply cumulatively. This means that a longer period of absence may all qualify as deemed occupation, as certain periods can be added together.

    3. Delay in taking up residence

    It is common in practice for an individual to acquire a house to live in as his main residence but then to be unable to occupy the property immediately because certain alterations or decorations need to be carried out.

    There is therefore a period of “absence” created at the start of the period of ownership. However, HMRC only allows PPR relief during this period of absence provided it does not exceed 12 months. Where there are good reasons for the period exceeding 12 months which were outside the individual’s control, the period may be extended up to 2 years.

    4. Use of home for business purposes

    PPR relief may be restricted if part your main residence is used for business purposes. If part of your home is used exclusively for business purposes, it is necessary to apportion gains into business and private components before considering PPR relief. In this instance, PPR relief is only given on the part of the property used as living accommodation.

    5. Garden and grounds

    A taxpayer’s principal private residence also includes gardens and grounds, provided the entire area, including the site of the house, does not exceed half a hectare. HMRC will permit a larger area to qualify for PPR relief if they are satisfied that the whole area of land is required for the “reasonable enjoyment” of the property.

    Unfortunately, the legislation does not give any guidance as to what constitutes the “reasonable enjoyment”. For instance, would 15 acres satisfy this criterion? Or 30 acres?

    Much turns on the facts of each case and therefore over the years there has been a large volume of case law in which the Courts have been asked to decide whether certain buildings and areas of land are within the meaning of the taxpayer’s principal private residence, or whether they are separate assets for CGT purposes.

    Given the significant tax at stake in this circumstance and the myriad of considerations, specialist advice should be sought prior to considering a sale as to the availability of PPR. HMRC can and do take a firm line with the sales of such properties.

    6. Development of property

    Taxpayers owning large properties may be tempted to consider developing all or part of the property into separate units so as to increase profit on sale of individual units, or, to move into a completed property within the grounds prior to selling the original property. Many commercial opportunities for garden development will present themselves on a regular basis and it is essential to put tax planning in place.

    Subject to the point above, gardens are likely to be considered to be a part disposal of a residential property. The legislation tells us that land that forms part of a garden or grounds of a residential dwelling is considered to be residential even if it is sold separately to the property.

    Therefore, the residential rates of CGT will apply, however, an amount of the gain is likely to covered by PPR relief.

    That said, selling off part of the land for development purposes, or developing the land yourself, implies that the land in question is not required for the reasonable enjoyment of the house, and therefore an argument may be made that PPR should not be available.

    Do bear in mind also that the availability of PPR relief will be lost at the point the residence is sold. For example, if the residence is sold before the development of the land, PPR relief will not be available on any subsequent land disposal and so the gain would be subject to CGT at the appropriate rate.

    7. More than one residence

    As a general rule, a taxpayer can only have one principal private residence at any given time. Where an individual has more than one private residence, assuming that no action is taken on their part, HMRC will determine which of the two properties is to be treated as the principal private residence for CGT purposes as a matter of fact. Usually the property which is most commonly used as a main residence, will be regarded as the PPR.

    However, the taxpayer can instead make an election to nominate one of the residences as his PPR for CGT purposes.

    If a taxpayer wishes to nominate which of his residences is his PPR, he must make an election to that effect within two years of the date from which he had two residences. Note that in order to make the election the individual must actually reside in both properties. A rental property cannot be elected.

    Typically, the taxpayer will elect for whichever of the properties is standing at the largest capital gain to be his principal private residence. This need not necessarily be the residence in which the taxpayer spends the majority of his time.

    8. Rules for spouses

    Where a husband and wife or civil partners are living together, they may only have one qualifying PPR between them. It is not possible for them to each own a property, and for each of them to elect for the different properties to be their own respective PPRs.

    If, at the date of marriage, the two parties each own a residence and the couple thereafter continue to use both properties as residences, they can jointly nominate which of the properties is to be treated as their qualifying residence for PPR purposes. There is a two-year period for making the nomination which commences on the date of marriage. The effect of marriage is therefore that one property ceases to qualify for PPR relief and becomes exposed to CGT.

    If the husband and wife are living together and the property subject to the transfer is their only or main residence at the date of the transfer, for PPR purposes the donee spouse is deemed to have acquired the part transferred at the date when it was acquired by the donor spouse. In addition, any periods during which the donor had occupied the property as their PPR are similarly deemed to be PPR periods for the done.


    Whilst PPR relief is an attractive CGT relief, as can be seen above the Government and HMRC do see this relief as generous and have made many attempts to narrow the availability of this relief. Further, we see further challenges by HMRC in the Tribunals against, what they see, is speculative claims for these reliefs.