Private Residence Relief and Lettings Relief


Individuals selling a residential property should consider the reliefs available for capital gains tax purposes, and whether these may reduce or eliminate any capital gain arising on the disposal.

Capital gains tax may be an afterthought when selling a property that is the vendor’s home, since there is a common misconception that any uplift in value on a main residence will automatically be tax-exempt. Whilst this is generally the case, scenarios where the exemption may be restricted include where the seller owns more than one residence, the property has been let out, or there have been periods of absence from the property.

Private Residence Relief

A residential property will qualify for capital gains tax Private Residence Relief (PRR) in respect of any periods during which it has been occupied as an individual’s only or main residence. The relief also extends to the last 18 months of ownership, regardless of how the property is used during this time, provided the individual factually occupied it as their main residence at some time during the ownership period. However, the 18-month grace period will be reducing to nine months for disposals on or after 6 April 2020.

The effect of PRR is to exempt from tax the element of any capital gain on disposal which corresponds to the qualifying period of ownership.

There are also periods of deemed occupation which qualify for PRR, namely:

  1. Any period during which the individual is employed abroad, and all the duties of the employment are performed outside the UK;
  2. A period of up to four years (or separate periods of absence which together do not exceed four years) during which the owner is absent from the property by reason of working elsewhere, whether in the UK or abroad; and
  3. Any period of absence not exceeding three years, or periods of absence which together do not exceed three years.

Relief under (1) and (2) above is also available where the individual lives with a spouse or civil partner who satisfies the relevant work criteria.

An individual can accrue more than one period of deemed occupation in respect of a single property, but in most cases must occupy the property both before and after the relevant period if it is eligible for relief.

Delay in taking up residence

After a property has been acquired, sometimes there is a delay in taking up residence whilst renovations and alterations are undertaken. HM Revenue & Customs (HMRC) operates an extra-statutory concession, under which PRR is extended to include this period of absence, provided this does not exceed 12 months. If the delay exceeds 12 months for reasons beyond the owner’s control, HMRC may extend the 12-month period to 24. Where the extra-statutory concession applies, the period of absence will only be treated as period of occupation if the new property becomes the owner’s only or main residence once the alterations and decorations etc have been completed.

More than one residence

As a general rule, an individual can only have one main residence at any given time. This includes periods of deemed occupation, which cannot overlap with any periods for which another property is the individual’s main residence. However, the last 18 months (nine months from 6 April 2020) of ownership will always be exempt, regardless of whether the individual has another property that qualifies as their main residence during this time.

Where an individual owns more than one property, their main residence will be a question of fact, unless an election is made (see below). Normally, the main residence will be the property most commonly occupied as a residence by the individual, and whilst there is no minimum period of occupancy, there should be some indication of a degree of permanence.

The following points may be considered in determining an individual’s main residence, although none is necessarily conclusive:

  • The address on the individual’s tax return forms;
  • The address on third party correspondence;
  • The degree of security of tenure enjoyed;
  • The furnishings in each residence;
  • Where the individual and their family spend’ most time;
  • Where the individual is registered to vote.

Electing a main residence

If an individual resides in two or more properties, they can elect one property as their main residence. The election must be made within two years of the date on which they start to have two or more residences, but the elected residence need not be the one in which most time is spent. It may be advantageous to elect the property likely to generate the largest future capital gain.

Only one property can be elected as the individual’s main residence at any one time, but the election can be changed within the two-year window. From a tax planning perspective there are certain scenarios in which this may be beneficial. For example, if the property currently elected is due to be sold in the next 18 months (and so will qualify for the 18-month exemption), it may be appropriate to elect another property as the main residence.

If the property for which a main residence election has been made ceases to be occupied as a residence (for example, it is left empty or tenanted), the election will lapse and the individual’s main residence will fall to be determined on a factual basis (until such time as a further election can be made).

Lettings relief

Where a property has been an individual’s only or main residence at some point during their period of ownership (but not for the whole period), lettings relief may also be in point. This relief covers periods in which the home is rented out and is the lowest of:

  1. The gain attributable to the period for which the property is let;
  2. The gain qualifying for PRR; and
  3. £40,000.

Lettings relief cannot turn a capital gain into a loss, but it can reduce the gain to zero. However, from 6 April 2020 lettings relief will only be available where the owner was in shared occupation with the tenant. This is likely to have a negative impact on homeowners who let out their home and move to a second property or abroad.

Business use

PRR may be restricted if part of the main residence is used exclusively for business purposes. In this case, it will be necessary to apportion the capital gain between the business and private elements, as PRR will only be available on the private element. The apportionment should be made on a just and reasonable basis, and in practice is usually based on the floor area of the business space compared to the rest of the property.

Spouses and civil partners

Where a husband and wife or civil partners are living together, they are only entitled to one main residence between them. If, at the date of marriage, each party has their own residence, and thereafter they use both properties as residences, they can jointly nominate one of the two properties to be treated as their main residence for capital gains tax purposes. In this case, the two-year window during which the election needs to be made will commence on the date of marriage.

This factsheet is based on law and HMRC practice at 1 September 2019.