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Your principal private residence (PPR) will always be exempt from capital gains tax subject to certain conditions. Firstly, it must actually be your private residence. If you choose to live elsewhere and use it for some other purpose, such as renting out or running a business, then you will lose your PPR relief either in whole or in part.

You could also lose part of your PPR if you live in only part of your house, whilst the other part is rented out or used for a business. Your PPR would then be restricted by a) the fraction of the house not used as your residence and b) the length of time that part has not been used as your residence (as a proportion of the total length of time you have owned the whole house).

However, you are allowed to have a home office for your business without any restriction of PPR provided you keep some domestic use of the room. You can even let it to your limited company provided it is not used for business all the time - perhaps by having a clause in the license agreement making it available only between certain hours. You should also be able to avoid business rates on a home office provided there is no public access.

Unless you elect otherwise, your principal private residence will be deemed to be where you live and there is no need to advise HMRC of this - they will grant exemption for it automatically. However, care should be taken when a couple get married, as spouses (and civil partners) are only entitled to one PPR between them. Unless you elect otherwise, HMRC will automatically deem the matrimonial home to be your joint PPR. This could cause problems if both spouses own property and they choose to live in the least valuable one.

If you are lucky enough to own more than one property and at some point you use both as your home, you can choose which one is your principal private residence by making an election. There is no special form for doing this - a letter to your tax office will do. However, the property must be actually used as one of your residences on a regular basis, preferably at least once a week. Note that it is not necessary for a nominated property to be where you usually live. In other words, it does not actually need to be your principal residence in order to qualify for PPR relief.

You cannot do this on a property which is let to tenants or unavailable for other reasons. You must also show that you intended to make the property an ongoing residence when you first moved in, even if subsequent circumstances made you change your mind later.

There is no set minimum period of occupation in order for PPR to apply. It could be as little as a week, although most advisors would recommend 6-12 months. What matters is your intention, so if you make it obvious that a property is now your main residence by letting your bank, tax office, employer, insurance company, the DVLA and other relevant persons know of your change of address, there can be little argument. Even a temporary arrangement with the Royal Mail to re-direct your post may be sufficient. You have up to 2 years after moving into a property to make this election. You can then vary or revoke the election at any time afterwards. However, if there is no election within the first 2 years, the Revenue will decide for you on the basis of facts presented, which may not be to your advantage.

Changing your principal private residence is a process that came to be known as flipping during the scandal over MPs expenses in 2009. There was nothing illegal about them doing that, their accountants recommended it and even their own parliamentary rules allowed it at one stage. The reason why so many MPs got into trouble over this was because they did it on properties they had previously been claiming second home allowances on at the expense of the taxpayer. It was therefore seen as being morally reprehensible in a way that wouldn't have been the case normally.

The reason why flipping is so tax-advantageous is because the last 18 months (3 years up to 5th April 2014) you own a property are disregarded for capital gains tax if it has been your principal private residence at any time. It doesn't matter what you do with a property during those years - you will not incur any more capital gains tax as a result. Therefore, if you own 2 or more properties, you can make sure they all benefit from the last 18 months by living in them at some point and electing them as your main residence. You may also benefit from Residential Letting Relief if the property has been let out as a home at any time.

In addition to this, you can also claim the first year of ownership for PPR relief if you buy a property with the intention of using it as your main residence but do not move in straight away because you are still having the property built; are renovating it; or you are still living in your old property whilst you are selling it. In fact, you could get up to 2 years in special circumstances by asking HMRC permission.

However, in general you should try to avoid very long periods of absence. The Revenue will only allow absences to count towards your PPR provided that a) the property was your actual or nominated residence both before and after the period of absence and b) it was an exempt absence. An exempt absence can be a) any period of time during which it was necessary to live elsewhere in order to work abroad; b) 4 years if it was necessary to live elsewhere in order to work in another part of the UK; or c) 3 years for any other reason. Absences are also disregarded for married couples who separate; otherwise the spouse who leaves could incur a capital gains tax liability if the whole property is transferred to the other spouse later. However, there are certain conditions that need to be met for this exemption to apply.

You need to be careful about houses with large gardens. Land surrounding a house (and any outbuildings on it) usually qualifies for PPR relief provided it is enclosed and not used for any purpose other than normal domestic use. However, you are usually only allowed half a hectare (about 5,000 square metres including the house itself) for PPR relief, although you can have more provided you can show that it was required for the reasonable enjoyment of the house as a residence having regards to its size and character. It has been held that staff accommodation can be included as part of your main residence, although you probably wouldn't get away with stables (unless they were within the half-hectare) as keeping horses is unlikely to be seen as necessary for the reasonable enjoyment of a property in this day and age. You probably wouldn’t get away with selling land outside the half-hectare separately as it would then be self-evident that it was not necessary for reasonable enjoyment, unless you could prove that it was sold out of financial necessity or some other pressing reason.

You also need to be careful about disposing of a property piece-meal. For example, if you sold a house with only part of the garden and then sold the rest of the garden later, the second sale would not qualify for PPR relief as the house is no longer attached. A similar situation could occur with outbuildings such as garages. It is becoming increasingly common for buyers to negotiate the purchase of a garage separately from the main house at a later date in order to reduce the SDLT payable. The garage is then let from the previous occupier for a short while before it too is sold for a figure below the SDLT nil-rate threshold. Vendors should be careful with arrangements of this type as they could incur capital gains tax liabilities on the sale of the garage. As a linked transaction, it would not work for SDLT purposes anyway.

The PPR will never be allowed if you buy a property for the express purpose of selling it again for a profit. You should therefore try to avoid selling a property soon after you bought it, especially if you have carried out a lot of renovation work. It sometimes makes us shudder to hear the unguarded comments made by people appearing on property development TV programmes. Sometimes they decide to live on in the property themselves after developing it but only after compromising their position by talking about how much profit they're going to make out of it. One can imagine that quite a few tax inspectors watch these programmes with more than a little professional interest!

Finally, it should be noted that PPR relief could actually be disadvantageous in times of falling property prices. It may be better to elect for another property to be your principal private residence if it looks like you may eventually have to sell the house at a loss, as then you would be able to offset the loss against your capital gains in the same tax year or carry it forward.

Acumen Tax Solutions
2 Purley Bury Avenue, Purley Oaks, Surrey CR8 1JB
Tel: 020 3669 5270 Mobile: 07813 582890 E-mail:

For information of users: Although every care has been taken in compiling this material, it only provides an overview and does not take the place of an individual consultation. We strongly advise all users to consult the detailed legislation or seek professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or this firm.

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