The vast majority of people buy a house to live in, not with a view to make a profit on it when it is sold. This counts as someone’s principal private residence, i.e. the main place where they live. For tax purposes you can only have one private residence. Any gain on your private residence is exempt from capital gains tax, this is known as Principal Private Residence Relief or PPR relief
However, if there is a proportion of the time when you own the property that you don’t live there, that proportion of any gain will not be exempt from capital gains tax. Say for example, you owned a property for ten years, and for 4 years of that time, you lived there and for 6 years you lived elsewhere, 6/10ths of the gain would be subject to capital gains tax. As you would take 4/10ths of the gain (this is your PPR relief) and deduct it from your gain.
Sounds simple right?
Well not so much, as there are times where, for tax purposes, you are deemed to be living in your property, even when in fact, you are living elsewhere.
HMRC do appreciate that it takes time to sell a property, and so there may be times when you are living in your new house, but your other house is waiting to be sold. At this point in time, you don’t own two properties because you are looking to make a profit on the sale of the property, it just hasn’t sold as yet. Therefore for the last 18 months of ownership of a property in which you have lived in at some point, the last 18 months of your ownership are “deemed residence”, i.e. it doesn’t matter where you lived in that period, you are deemed to be living in that property.
There are other periods where you are deemed to be living in the property even when you are elsewhere. However, you must have at some point previously, and at some point after, you actually live in the property.
- Any period when you were overseas for employment.
- Up to 4 years when you are elsewhere in the UK due to your employment.
- Up to 4 years when elsewhere, within the UK and overseas, due to reasons of self-employment.
- Any period for any reason for up to 3 years for the life time of the property.
Let’s have a look at an example.
Daenerys bought a house where she lived with her partner Khal, in June 1432. She lived with him, until he unfortunately passed away in June 1433. She left the house in July 1433 point to take up employment elsewhere in the UK as a dragon trainer. She worked there for 10 years, training dragons, until she decided that this was too dangerous. So at the end of June 1443, she came back to live in the house for 6 months. She then decided to go to travelling overseas. She never returned to the house and sold it in December 1448, realising a gain of £100,000.
The first year would be actual occupation as she actually lived there. She then left the property for employment reasons. As she returned to the property later on, she can claim a couple of reliefs for this period. She could claim 4 years for being employed elsewhere in the same country, and she can also claim 3 years for any reason. So she was away for 10 years, but 7 of these would be deemed occupation. She then returned to the property for 6 months before leaving the property for 5 years. Due to the fact that she lived in this property at some point the last 18 months of ownership would count as deemed occupation as well. So of the 16 ½ years that she owned it, she was deemed to be living there for 10 years. So the PPR relief would be 10/16.5 x £100,000, giving PPR of £60,606. This would be deducted from the gain of £100,000 giving a chargeable gain of £39,394.
Why don’t you have a go at the below question?
Jon Snow bought a UK castle from his step father Ned, in January 952. He lived there for a year, and then in January 953, he left to take up employment in the North of the UK watching a wall. After three years watching the wall, he left his employment in January 956, and he decided to go travelling north of the wall. After 4 years he got tired of wandering around in the cold he returned to his castle in January 960 and set his own business as a self-employed King.
After spending one year with his sister Sansa, he could take no more of her, and took his self-employed business abroad. From January 961 to the end of December 965 he worked abroad as a self-employed king. Finally he got tired of all of this and retired to a small island, and put his castle up for sale. It took until December 967 to sell, but when it did sell it realised a gain of £200,000.
What is the chargeable gain on disposal after PPR?
You can see me work out the answer below: