Capital Gains Tax – New Restrictions to Private Residential Relief

Background & how it works

Private Residence Relief (PRR) has been the longest standing, and arguably the most important tax relief available to the majority of taxpayers. Since its introduction alongside the launch of Capital Gains Tax (CGT) in 1965, the relief has provided cover from one of the largest tax charges individuals may encounter; the tax bill accruing upon sale of your home.

The main aim of the relief is to ensure that individuals can dispose of their home (or one thereof) and reinvest those funds without becoming subject to a large tax bill.

Where the property has been your only home and residence throughout the entire period of ownership, then the relief takes effect by reducing the chargeable gain to nil.

However, where the property has not been your main home, or has been let for any period throughout your period of ownership, restrictions apply to bring part of the gain under charge to CGT.


Important changes

Various changes to the PRR ancillary reliefs were announced in the 2018 budget, potentially impacting an additional 40,000 taxpayers each year.

One feature of PRR is that the last period of ownership if free from CGT, regardless of whether or not the property was occupied through this period.

This ‘final exemption period’ was a generous 36 months from the introduction of CGT in 1965 until April 2014, where the period was shortened to 18 months.

Now, the final exemption period is set to be halved yet again to 9 months for any disposals made on or after 6 April 2020.

Further changes are also coming to lettings relief which was originally introduced in 1980 to ensure individuals could let out rooms in their current or former main residence without losing the benefit of PRR. This provided a maximum benefit of reducing a chargeable gain by £40,000.

This will now be restricted to cases where the owner shares occupancy in the property with their tenant, effectively cancelling this relief.

As this applies for any disposals after 6 April 2020, a retrospective view of the property’s history must be taken into account when calculating any chargeable gain which may accrue, effectively leaving many with an unexpected tax bill.


Common practical issues

PRR is only available on your main residence. Where multiple properties are owned, the relief may be difficult to calculate due to determining which dwelling has been your main residence. HMRC would look to review and potentially issue challenges to PRR claims where an individual’s affairs are complex.

The principles to establish this have been developed in recent case law, where the quality, length and circumstance of an individual’s stay in a property, in addition to whether the stay shows a degree of permeance and continuity are considered.

An election may be made to HMRC to nominate a property to be treated as your main residence within two years of the period that you occupy multiple properties. Where this nomination is made, you will qualify for relief for most of the time that you live away, in addition to avoiding a potential HMRC enquiry into the validity of your claim to relief.

Without a nomination, where one or more of these properties are sold, HMRC will have to decide based on their interpretation of the facts which property is to be treated as the main residence which may lead to a restriction of the maximum relief available. The quality of evidence presented is therefore important to successfully challenge these assumptions.


The impact

HM Revenue & Customs gives an example of how to apply the current rules on the website;

An individual (Mr. X) makes a gain of £120,000 on his home which was owned for 12 years. This was occupied as his main residence for the first 6 years, and then let out for the following 6 years.

PRR is available for the 6 years that Mr X lived in the property, and for the final exemption period of 18 months. This means that currently, 7.5 years of the 12-year ownership period (62.5%) is relieved with PRR. So PRR reduces this gain from £120,000 to £45,000.

However, currently Mr A would also be able to benefit from the maximum amount of letting relief of £40,000, reducing the gain chargeable to CGT to £5,000. This would give Mr X an expected tax bill of approximately £1,400 (assuming the whole gain is taxed at 28%).

Under the new rules, Mr X’s final exemption period is reduced from 18 months to 9 months. This reduces the PRR available to 56.25% of the gain.

In addition, lettings relief would not be available in this case if Mr X did not share occupancy with the tenant, increasing the total chargeable gain to £52,500 a hefty tax bill of approximately £14,700.


With the above changes coming into effect for disposals on or after 06 April 2020, we can advise on how your property transaction will be affected by these rules If you believe you may be one of the 40,000 affected taxpayers, please get in touch to see if we can help ensure that the maximum relief is made available.

For further assistance on these matters please contact,

Darren Heresy (

Debbie Dolega (

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