Understanding PPR with Ernst & Young

Taxes (and reliefs) for residential property owners.

Most will be aware there is no capital gains tax (CGT) applied to gains made on the disposal of a main or only home. It does, however, follow that a taxable gain could arise if they have not lived in their home throughout their full period of ownership.

Here is a summary of the Principal Private Residence (PPR) Relief provisions and - as importantly - some reliefs available to cover certain periods of absence, known as ‘deemed occupation’.

Understanding Principal Private Residence Relief

PPR relief is available when owners make a gain on the sale of their only or main residence and have lived in it throughout their period of ownership. It exempts all (or in some cases part) of the capital gain that arises on disposal.

If PPR relief is not applicable, gains realised on the disposal of residential property are taxed at 18% (for basic rate taxpayers) and/or 24% (for higher or additional rate taxpayers), payable within 60 days of disposal.

Calculation of PRR Relief

PPR relief operates by exempting all, or a proportion of, any gain on the disposal of a main residence, based on the amount of time the property has been occupied as the owner’s only or main residence, for the total period of ownership.

The default position for tax purposes is that periods of absence are treated as ‘non-occupation’ when calculating how much relief is available and, consequently, how much gain could be chargeable to CGT. Certain concessions allow for periods of absence to be treated as ‘deemed occupation’ and can substantially reduce the CGT liability.

Periods can apply cumulatively, allowing for longer periods of absence to be added together. One vital condition is that the property must have been the owner’s residence prior to the period of absence, and they must return to living in it as their main or only home for the absence to qualify as ‘deemed occupation’ and PPR relief. There is a limited exception that applies without returning if an individual is prevented from doing so by reason of their employment, but this would require careful consideration.

Where married couples jointly own the main or only property, the absence relief also applies to accompanying spouses.

For illustrative purposes: a property is jointly owned by a married couple for a period of one year and the family moves abroad for the employment of one spouse. They decide to rent their property (using Rettie, of course!) and are absent for a period of eight years. Upon return to the UK, they weigh up whether to sell or return to the property. If they return to the property, their entire period of ownership should qualify for PPR relief, but if they sold the property without moving back in only one-ninth of any capital gain would be exempt, with eight-ninths being subject to CGT.

HMRC has not provided guidance regarding how long a taxpayer must live in a property for it to be considered ‘occupation’. HMRC will, however, consider the circumstances of each case individually and are more likely to assess the substance and quality of occupation, rather than duration.

Final 9 months of ownership

Finally, it is important to highlight that the last nine months of ownership will be exempt from CGT, irrespective of whether owners return to live there – again, as long it was the main or only residence at some point during their period of ownership.

(Note: the above is a top level summary and given the complexities of PPR Relief, professional tax advice is strongly recommended)