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.

Fortunately, where a property has been used as a person’s main / principal private residence at some point during its ownership then there is a CGT relief exempting the disposal. This is known as Principal Private Residence Relief (“PPR”).

However, there are more complex scenarios which can restrict the availability of PPR. It is important to consider these factors and to not take the sale of a main residence as being a given that PPR will apply and the taxpayer falls into an unforeseen money pit. We outline those main problem areas below.

Actual occupation – To avail of PPR, a taxpayer must have actually occupied the property as their main residence at some point in the period of ownership. 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. In essence though, it would be no good to simply divert post to a property you own and claim it as your primary residence!

Deemed occupation – Certain periods of absence from a property 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 and so must be reviewed carefully.

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.

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.

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”. Much turns on the facts of each case and HMRC can and do take a firm line with the sales of such properties.

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. 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. It is essential to put tax planning in place

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. However, the taxpayer can instead make an election to nominate one of the residences as his/her PPR for CGT purposes. This need not necessarily be the residence in which the taxpayer spends the majority of his time.

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. The effect of marriage though is that one property ceases to qualify for PPR relief and becomes exposed to CGT from that point.