Are All House Sales Tax-free? Principal Private Residence and What it Means to You

September 19, 2019 Categories: Money, Tax

For most people, owning and selling a home is seen as a tax-free endeavour, but as you’d guess, things are never quite as simple as that.

Principal Private Residence Relief (PPRR) is a set of rules that ensure the sale of a home is exempt from tax under certain conditions.

If you own one home, live in it and then sell it, any gain is tax-free. But what if you lived elsewhere because of work commitments and decided to let out your main home in the process?

The PPRR rules are complex, and the government is making some changes.

The good news? We’ve reviewed them and can now provide a no-nonsense, simple guide.

Change 1: transfers between married couples

Capital gains tax (CGT) rules state that any transfer of assets between married couples or civil partners should be on a no-gain/no-loss basis.

Under PPRR, if a spouse transfers their only home to their partner, the receiving spouse inherits their period of ownership, even if it started before the marriage.

The rule doesn’t apply to homes that are not the main residence at the time of transfer, but to make tax rules consistent, the government will allow transfers of an interest in a dwelling to a spouse to pass on the ownership history, including any previous use of the property.

Change 2: the final period of ownership

The final period of home ownership is usually tax-free, regardless of whether it’s occupied in that manner. Under the new rules, the final period of tax exemption will be reduced from 18 to nine months.

The existing rule, which gives 36-month relief to anyone with a disability or those moving into care, will remain unchanged.

Change 3: lettings relief

Lettings relief is designed to ensure people can let out spare rooms on a casual basis without losing the benefit of PPRR.

The government believes lettings relief extends far beyond the original policy intention and benefits anyone who lets out a property which was at some point their main home.

Under the new rules, if a gain arises on a home at any time during the period of ownership, lettings relief will be due if:

  • part of the home is the individual’s only residence; and
  • another part of the home is being let out as residential accommodation.

So, that means lettings relief won’t be available for periods where an owner has moved out of the property and no longer lives under the same roof as the tenant.

Let’s explore an example of lettings relief changes

We appreciate the above might need some more light shedding on it, so, let’s turn our attention to Eric.

Eric bought a house for £200K on 1st January 2000. He then sold it on 31st December 2020 for £350K. During the 20 years he owned the property, Eric lived there and nowhere else for 17 years and let the whole property out for three years before selling.

His net gain is £150K, and PPRR will be valuable for the period Eric occupied the house. So, a gain of £127,500 is eligible for relief, with £22,500 left susceptible to CGT. He’ll also qualify for nine months of final period expedition (£5,625 in total), thus reducing his taxable gain to £16,875.

Because Eric didn’t share the residency with his tenants, lettings relief will not apply for the three years during which he let out the property.

Should Eric not use his annual exempt amount of £12,000 for the year, he could reduce his taxable amount to £4,875.

Change 4: need to report and pay tax

In addition to PPRR changes, the government will also be introducing a reporting requirement for anyone who sells a residential property in the UK, including residential investment properties and situations where the sale of a home is not fully covered by PPRR.

In those situations, a special return needs to be filed within 30 days of completion, and the seller will be liable to pay that amount on account on the filing date for the return.

Confused? Need help?

These changes will apply to home sales undertaken from 6th April 2020. If you have any questions at all on the implications for you, please get in touch with our knowledgeable, friendly team.