It is fairly common for a property owner to rent out a house that was formerly used as their principal private residence (‘PPR’). When this has taken place, the impact on PPR tax relief should be considered.
Principal private residence relief (‘PPR relief’)
PPR relief is generally available to shelter a gain on a property if it has been the main residence of the owner throughout ownership. If this has not been the case throughout ownership (for example, if the property has been let) then the PPR relief may need to be restricted, although no restriction is required for the last nine months if the property has been a PPR at some point. There are also certain other deemed periods of occupation which will not restrict the availability of the relief. These are:
• You are abroad by reason of your employment (unlimited time period);
• You are absent from the property as a result of working elsewhere, either as an employee or a self-employed trader (up to a maximum of four years);
• You are absent from the property for any reason, up to a maximum of three years.
These are only deemed periods of occupation if you live in your house both before and after the absence.
Karen disposed of a house that she had owned for 3,000 days on 20 January 2023. For the last 650 of those days she let the property to a third-party tenant. She made a £600,000 gain on the property. Here 2,625 (number of days let that are not in the last nine months)/3,000 of the gain (or £525,000) should qualify for PPR relief, leaving £75,000 still chargeable. As a residential gain, any gain remaining after Karen’s annual exemption will be taxable at 28% (assuming that Karen is a higher rate taxpayer).
The position here would be different if Karen had moved back into the house. In this case she would be able to make use of the three-year absence rule above and, as 650 days is less than three years, there would be no restriction and so full PPR relief would be available.
Forbes Dawson view
This point is now more relevant since lettings relief was abolished (for most cases) from 6 April 2020. The tax saving would need to be quite significant to change people’s behaviour (would a £21,000 saving in the above example be enough?) However, I am sure that they would appreciate understanding the position before, rather than after the sale, when they would be in a position to improve the position.
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