Claiming Private Residence Relief

August 11th 2023

Two property owners are about to sell residential property. One has lived in their property intermittently whilst working in the UK and overseas, whereas the other has never lived in their property at all. How could both owners potentially claim private residence relief (PRR) in full? Our Head of Tax Christiaan Hansen advises.

Owner number 1 purchased their property ten years ago. They lived in it for two years before being seconded by their employer to work in another part of the UK. They lived there for five years before being seconded to work overseas for one year. They remained living overseas for a year after their employment ceased before coming back to the UK to live in their property for a final year.

Owner number 2 works as a farm manager and lives in a cottage provided by their employer. They purchased a residential property with a view to living in it once they had retired and have let it out since purchase. They now have the opportunity to purchase the farm from their employer, so they are selling the property to help raise the necessary funds.

To assess the entitlement to private residence relief (PRR) the rules surrounding periods of non-occupation must be considered.

The basic principle of PRR is that if an individual occupies a property as their only or main residence throughout their period of ownership, full relief from capital gains tax will be available on any gain generated on sale. However, there are a number of occasions where an individual will be treated as though there were in occupation of a property and so obtain relief for periods when, in fact, they were absent from the property.

Final period of ownership
Probably the most common scenario where relief is available despite not being in occupation of a property is the final period of ownership. Since April 2020 the final period is nine months.

The intention of the exemption is to aid sellers who are having difficulties finding a buyer, however the final period of ownership will always qualify for relief as long as the dwelling has been its owner’s only or main residence at some point in their period of ownership. This is regardless of having difficulties finding a buyer or the use of the property during that period.

Where the individual is a disabled person or a long-term resident in a care home, the final period of ownership is 36 months.

Delayed occupation
A further scenario where a period of non-occupation will be treated as a period of occupation is where there is a delay in taking up residence of a dwelling. From April 2020, PRR is available for the period between acquiring a property and moving in, where the following conditions are satisfied:
• Occupation of the property happens within two years of purchase;
• The property was not another person’s residence during the period of non-occupation; and
• A qualifying event happens during that period of non-occupation.

A qualifying event means the delay was either due to the completion of construction, renovation, redecoration or alteration of the property, or because the individual does not move in until they dispose of their previous residence.

There are three types of absence that can qualify as deemed occupation. The first is a period of absence for any reason of up to three years.
For the relief to apply, there must be a period of actual occupation of the property both before and after the period of absence.

The second is where an individual works in an employment or office outside of the UK, a period of absence of any length will be treated as a residence. The relief also extends to an individual who lives with a spouse who has an office or employment overseas.

All of the individual’s work duties must be performed outside the UK for the relief to apply. Holidays in the UK can be ignored, but incidental work in the UK cannot.

Where an individual is prevented from returning to a property because of their employer requiring them to reside elsewhere, the requirement to occupy the property after the period of absence is relaxed.

Finally, if an individual is prevented from residing in a property due to working elsewhere in the UK (or because of a condition imposed by their employer requiring them to reside elsewhere) a period of absence not exceeding four years will be treated as a period of occupation.
Again, the requirement to occupy the property after a spell of UK working is relaxed if the individual is prevented from doing so by reason of their employment.

The periods of absence are cumulative and can be applied in the way which is most beneficial for the owner. So, let’s look at how the various deemed periods of absence can apply to you owner number 1.

The first two years of ownership are covered by actual occupation as an only or main residence. Four of the five years working in the UK are covered by reason of employment in the UK, with the remaining year being covered by the “any reason” allowance. The year working overseas is covered by reason of employment outside the UK, with the year spent overseas post-employment again covered under the any reason allowance. The last year of ownership is again covered by the actual occupation as a main residence.

The owner can therefore claim PRR in full – even though the actual occupation was only three out of ten years.

For owner number 2, who has not occupied their property whatsoever, you would be forgiven for thinking that PRR cannot apply. However, this is where the special job-related accommodation rules can come to the rescue.

Where an individual owns a dwelling but lives elsewhere in property which is job-related accommodation, the dwelling will be treated as being occupied as a residence for as long as there is an intention to occupy the property in due course as their only or main residence.
Accommodation will be job-related if it is provided by reason of a person’s employment and where it is necessary for the proper performance of their duties or is provided for the better performance of their duties, or is provided as part of special security arrangements. Accommodation will also be job-related if the individual is contractually required to live there to conduct a trade.

The owner is contractually required to live in the cottage provided by their employer to conduct the farming trade and therefore the cottage is job-related accommodation for them. As they own a property which they intend to occupy as their main residence at some later date, the property will be treated as a residence for as long as the intention exists.

They might be concerned that the letting of the property will impact this, but relief will still apply even if the property was never occupied and even if it has been let throughout the period of ownership. As long as there is an intention to occupy the property at some point, PRR will apply.

The challenge will be to demonstrate that this intention existed if the claim is queried by HMRC.

Once the intention to occupy ceases, the property will no longer be treated as being occupied. In owner number 2’s case, this will be as soon as they decide to purchase the farm.

There are periods of absence that can be deemed as occupation, including those due to working elsewhere in the UK or overseas that should help owner number 1 first. Owner number 2 could qualify for PRR, even though they never occupied their property, if they have been required to live in job-related accommodation, and there was a genuine intention to occupy the property as a residence in the future.

If you have further questions about private residence relief or related queries please contact the team.