How to prove and calculate private residence relief (PRR)
Tax expert Steve Sims explains how to prove and work out private residence relief when selling a buy-to-let property.
Property investors who sell a buy-to-let property may try to establish that they lived in the home to claim private residence relief to save Capital Gains Tax (CGT). However it’s worth bearing in mind that claiming a buy-to-let property as your main home sets alarm bells ringing for the tax man.
Unfortunately tax law doesn't indicate how long someone has to live in a property before it's officially regarded as home. The law instead talks about ‘quality’ rather than ‘quantity’ of occupation.
Two recent tax tribunal cases have helped confirm some of the factors taken into account to prove PRR. In each of the cases HM Revenue & Customs (HMRC) looked at each claim separately and ticked boxes on a list to indicate whether the property was a home or a buy-to-let.
The lists below are taken from the tribunal cases of Dalgety and Day v HMRC and Hartland v HMRC, which both went before judges in the first three months of 2015.
Proving PRR checklist
These factors include:
- Was the property the owner’s main address for official correspondence?
- Were the utility bills in the owner’s name and sent to the property (not another address)?
- Was council tax exemption claimed?
- Did the local council pay housing benefit on the property?
- Was the owner on the electoral roll for the property?
- Where was the owner registered with a local doctor?
- When was the home advertised for sale?
- Was the property purchased with a buy-to-let or residential mortgage?
- Does the DVLA have the owner’s car registered at the address?
- Do telephone and internet bills tie up with the dates the owner claimed residence?
- Does the owner have photographic evidence of living there?
- Is the property in a habitable state?
- Where do the owner’s children live and go to school?
- Does the owner have a partner, and if so, where do they live?
- Is the property within a reasonable commute of the owner’s workplace?
Tax inspectors and tribunal judges will want to see that someone has genuinely lived in a property as their home, whether that's for a few weeks or a few years.
Recently judges have explained that when a property went on sale is important. Their argument is an owner couldn't have intended to make the property a permanent home if they'd moved in just prior to sale.
Why claim Private Residence Relief?
PRR reduces CGT on your main home to zero for the time you live there – and adds 18 months’ CGT exemption as a tax bonus if you have to move out before you sell.
If you can claim PRR and have let the property to a tenant paying rent at a commercial rate, you can also claim letting relief. Letting relief is another CGT relief worth up to £40,000 for each property owner. The key point is ‘commercial rate’. Homes where friends or relatives live for free or pay the mortgage and bills but no rent are uncommercial lets. Owners pay CGT on disposal of an uncommercial let but can't claim letting relief.
Combined, PRR and letting relief can significantly reduce the amount of CGT a property owner pays.
Calculating Private Residence Relief
Tax rules lay out a formula for PRR if the seller has only lived in the property as their home for part of the time of ownership.
The formula is:
Period of occupation
Total period of ownership
To work through this formula, calculate the time you have owned the property and the time you have lived there as a main home plus 18 months.
Take this example of Peter, who bought a home for £150,000 in January 2001 and sold it for £400,000 in January 2015. He lived in the property for just one year after buying and then rented out the home as a buy-to-let.
The calculation is easier in months rather than years because the 18-month bonus period converts to a fraction – 1.5 years:
| A |
Owned from January 2001 until January 2015 |
168 months (14 years) |
| B |
Lived in as main residence from January 2001 until January 2002 |
12 months |
| C |
Deemed occupation from January 2001 until January 2015 |
18 months |
| D |
Total CGT exempt occupation (B+C) |
30 months |
| E |
Chargeable gain |
£250,000 |
|
F |
CGT exempt gain (£250,000 x 30/168) |
£44,653 |
| G |
Gain chargeable to CGT (£250,000 x 138/168) |
£205,357 |
‘Deemed occupation’ is the 18 month bonus period.
Total CGT exempt occupation is the time Peter lived in the house as his main home plus the period of deemed occupation (B+C).
PRR is Step F and calculated as:
A - D
A
Where A is the period of ownership and D is the period of CGT exempt occupation.
Step G is effectively the gain less Step F.
Remember, each owner will have their own PRR calculation if they've lived in the property.
Find out more
This article only looks at the basics of PRR – for more detailed PRR information go to the HMRC website.
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Steve Sims
Last Updated: 27 May 2015