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Private Residence Relief: The New Rules

Sarah Bradford outlines forthcoming important changes to private residence relief for capital gains tax purposes.  

Following a period of consultation, legislation is to be included in the 2015 Finance Bill which will extend capital gains to gains accruing to a non-resident person on the disposal of a UK residential property. The charge will apply from 6 April 2015 to gains arising on or after that date. 

To prevent the new charge being negated, changes are made from the same date to restrict access to private residence relief (PRR). The new rules, as they apply in relation to PRR, are explored below.

Extension of capital gains tax
In the 2013 autumn statement it was announced that the UK would charge capital gains tax (CGT) on gains made by non-residents disposing of UK residential property from April 2015. 

Currently, the UK does not generally charge CGT on disposals by non-residents. This means that where a non-resident makes a gain on the disposal of a UK property, that gain is either taxed in the country in which the person is tax resident, or not at all. 

Where a UK resident person disposes of a residential property, the availability of PRR exempts any gain arising from tax to the extent that the property is the owner’s only or main residence. However, where a UK resident disposes of a UK property that is not covered by PRR, any resulting gain is taxable. This was not considered to be fair. The extension of CGT to gains on residential property arising from April 2015 seeks to address the imbalance in the rules as they apply to UK residents and to non-residents. 

PRR issue
PRR removes the charge to CGT in respect of a gain on the disposal of a person’s only or main home. If the property has been the person’s only or main residence for some but not all of the period of ownership, the gain is proportionately reduced. However, the last 18 months of ownership always qualifies for PRR where the property has been the main residence at some point. 

If a person has more than one residence, they can elect which residence is their main residence for PRR purposes. This can be a UK residence or an overseas residence. Where a person is not UK resident, prior to 6 April 2015 PRR was not relevant since no CGT charge arises on the disposal of residential property by a non-resident. However, from 6 April 2015, disposals of UK residential property by a non-resident are brought within the CGT net, with CGT applying on gains accruing from that date.

Without any changes to the PRR rules, it would be easy for a non-resident to shelter any CGT arising on a UK residence by electing for that residence to be their main residence for PRR purposes. Assuming a person who was not resident for UK tax purposes has homes in the UK and in (say) France, by electing for the UK property to be the main residence for PRR purposes, no CGT would be payable in respect of any gain realised on that property after 5 April 2015. As disposals of overseas properties by non-residents are not within the scope of CGT in the UK, there would be no UK tax to pay on the disposal of the French property either (although French tax may be payable).

Clearly this would negate much of the impact of the extension of CGT to gains arising on the disposal of UK properties by non-residents. As a result, changes were also needed to the PRR rules.

During the consultation phase, the Government proposed two possible solutions to this problem. The first suggestion was to remove a person’s ability to elect, where a person had more than one residence, which was their main residence and instead determine the issue by reference to the facts. In this scenario, the residence that would be eligible for PRR would be the one that was demonstrably the main residence. This is the approach that applies where a person has multiple residences and does not make an election. The second suggestion was to replace the ability to elect with a fixed rule that determined the main residence as that in which the person spent the most days in the tax year. 

Although respondents to the consultation marginally preferred the first suggestion, they felt neither option was attractive as both were too complex to administer successfully. Many respondents felt that limiting PRR elections to UK residents would be a more effective approach.

The solution
To deal with the PRR issue, a new rule is being introduced which will restrict the circumstances in which an overseas residence can benefit from PRR. An overseas residence is one that is in a jurisdiction where a person is not tax resident. Importantly, the new rule applies both to a non-resident disposing of a UK property, and also to a UK-resident disposing of a property abroad.

Under the new rule, from 6 April 2015 a person’s residence will not be eligible for PRR for a tax year, unless:

  • the person making the disposal was resident for tax purposes in the same country as the property for the tax year; or
  • the person spent at least 90 midnights in the property (or where they have multiple properties in a country in which they are not tax resident, those properties).

Spouses and civil partners can only have one main residence between them, and residence by one spouse or civil partner counts as residence by the other.

Where a person has multiple properties in a jurisdiction, the 90-day rule is considered by reference to the total time spent in properties in that jurisdiction. A person who is tax-resident in more than one jurisdiction can nominate a main residence in a jurisdiction of residence without reference to the 90-day rule.

Practical application
The new rule will mean that individuals who are resident in the UK will continue to be eligible for PRR in relation to UK properties. However, non-residents will need to meet the 90-day rule to elect for a UK property to be their main residence. Similarly, a UK resident will need to satisfy the 90-day rule for PRR to be available in respect of an overseas property. The new 90-day will apply equally to existing nominations.

Although the new rule does not apply until 5 April 2015, periods prior to April 2015 may need to be considered in working out the total amount of PRR available on disposal, as this may determine whether PRR is available for the final 18 months.


Example – The 90-day rule in action


Luigi has a house in London and a house in Milan. For the 2015/16 tax year, he is not resident in the UK but spends 92 midnights in the tax year in his London property. He meets the 90-day test and can nominate the property as his main residence for PRR purposes for that year.


As the property has been his main residence at some point, the last 18 months will qualify for PRR, even if the 90-day test is not met for that period.

A non-resident who meets the 90-day test in relation to a UK property should make a main residence election in respect of that property.

In seeking to meet the 90-day test for PRR purposes, care must be taken not to become UK-resident for tax purposes, as this will bring overseas properties within the ambit of a UK charge to CGT. 

Practical Tip:

The new rules mean that UK residents with overseas properties and non-residents with UK properties should review their portfolios and ensure that PRR elections are effective. 

This is a sample article from the monthly Property Tax Insider magazine. Go here to get your first free issue of Property Tax Insider.