Introduction

Relief from Capital Gains Tax (CGT) is available for a gain arising on the disposal of a dwelling house, or part of a dwelling house, which has been occupied as an individual’s only or main residence at some stage during the period of ownership provided certain conditions are met. 

Occupation as a residence

PRR is only available on properties that an individual has occupied as a residence. This is essentially a test of whether a reasonable person would regard a property as the individual’s home, taking into account the permanence and continuity of occupation and the individual’s intentions for the future.

Generally there is no defined minimum period of occupation required to make a property an individual’s residence, as the test is based mainly on qualitative issues as above, but special rules apply where neither the individual nor his or her spouse or civil partner is resident for tax purposes in the jurisdiction where the property is located. Broadly, where such a home has been occupied for fewer than 90 nights in a tax year by the individual and/or his or her spouse, it will be deemed not to have been occupied as a residence in that tax year. This rule mainly affects non-UK residents who own UK homes but it is also relevant to UK residents who own overseas homes. For individuals who are UK resident at the time of disposal, this deeming rule does not apply to tax years earlier than 2015/16.

Grounds

PRR applies to include up to half a hectare of the garden or grounds of a private residence, provided the land is for the individual’s occupation and enjoyment. This permitted area may be extended, if the additional land is in keeping with the size and character of the property.

Multiple buildings

PRR may generally be available on the disposal of a building which is owned together with the main house if it is:

• Part of the dwelling house; or
• Within the permitted area of garden or grounds

These conditions can give rise to considerable complexity in practice.

More than one residence

If an individual has more than one residence, the individual can elect which property they would like to be considered as their main residence for PRR purposes. The time limit for this election is generally two years from the date of occupation of the second or additional property as a residence, but special rules apply to individuals who are non-UK resident at the time of disposal. A separate note on CGT for non-UK residents is available.

No election

If no main residence election is made, HM Revenue & Customs (HMRC) will form a view as to which property they consider to be the factual main residence. The following list of criteria, although not exhaustive, may be considered:

• The address shown on declarations made on return forms; 
• The address shown on third party correspondence, such as dividend warrant counterfoils;
• What security of tenure the individual has in respect of each residence;
• How each residence is furnished;
• Whether the individual is married, and where the individual’s family spends most of their time;
• At which residence the individual is registered to vote;
• The location of the individual’s place of work.

Married couples and civil partners

A married couple or civil partners who are living together can only have one main residence between them. Accordingly, a main residence election that affects them both must be made jointly. For this purpose, ‘living together’ means that the couple are not separated permanently or in circumstances that are likely to be permanent. Unmarried individuals and married couples who are separated can however have different main residences.

Amount of relief

Where the property has been the individual’s only or main residence throughout the period of ownership, any gain arising on a subsequent disposal will not be chargeable to CGT. Where this is not the case, the fraction of the total gain that relates to periods of occupation (including a ‘final period exemption’), as a proportion of total ownership, will not be chargeable. The final period exemption for disposals is normally 9 months. For some disabled individuals and long-term residents of care homes the period is 36 months.

There are other circumstances in which an individual may be deemed to occupy a property as a residence for PRR purposes, namely:

• A period, or periods, of absence which together do not exceed three years;
• Any period of absence throughout which the individual worked in an employment or office, all the duties of which were performed outside the UK; 
• Any period, or periods, of absence which together do not exceed four years, throughout which the individual could not reside in his dwelling house because of his or her location of work.

For any of the above circumstances to qualify, the property must be the individual’s only or main residence both before the period of absence and following the period of absence (unless the absence was work-related and the individual was prevented from resuming residence due to certain work related reasons). During the period of absence, relief is not available for periods during which another residence is treated as the only or main residence (which can include rental properties). If the individual owns or rents another residence during the period of absence, a main residence election (see above) may therefore be required in order to protect the relief.

In addition to the above, there are special provisions for an individual who lives in job-related accommodation (as defined) and owns a separate property that he or she intends to occupy as his or her main residence. 

Finally, for periods when an individual is only occupying part of the dwelling house as their main residence and another part is being let as residential accommodation, it is possible that the gain may be reduced by letting relief of up to £40,000.