Does home working affect Principal Private Residence Relief (PPR)?


There seems to be something of a ‘tax myth’ about the capital gains tax position if a home worker sells their private residence. Generally when an individual sells their main house they expect to be able to do this without realising a taxable capital gain (or a capital loss if the market has gone against them). But what is the position if the house is not just used as a place of residence but also as a place of work? Home workers understandably want to maximise tax deductible expenses that are ‘wholly and exclusively for the purposes of a trade’ but some are being put off doing this due to a perception that they will be prejudicing their capital gains tax position when they come to sell their home. However, usually, any gain on a disposal of their home will be completely tax free even if property expenses have been claimed as a business expense.


The technical position

The capital gains tax legislation (TCGA 1992 section 224 (1)) if you want to get technical) only excludes from relief any part of the dwelling house which is used exclusively for the purposes of a trade, business, profession or vocation. Therefore a room which is used partly for business purposes and partly for residential purposes will not restrict relief. It therefore follows that there is an advantage in having some domestic item in the ‘business room’ such as a television. The point was made in a recent article in a tax journal that the kitchen of a small guest-house may be used equally to provide meals for the resident owner and to provide meals for the guests. This would mean that there would be no restriction to PPR although a proportion of the expense of heating and lighting the kitchen, together with fuel for cooking may be deductible in computing the income profits. In fact depending on the number of guests up to 80% (say) of these costs may be deductible without disturbing the PPR position!


Final word

Of course there will still be extreme cases where restrictions will apply. For example if a dentist has a surgery attached to his house, prima facie a PPR restriction would be applicable. However HMRC acknowledge in their guidance that the exclusivity test is stringent and HMRC officers should not usually seek any restriction to PPR for a room which has some measure of residential use. With this in mind the dentist may want to think about doubling his surgery up as a home cinema in the evening…




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