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February 3, 2022

Beware: Private Residence Relief elections when renting a second property

If you sell a property which is your only or main residence or has been at some point during your period of ownership, Private Residence Relief (“PRR”) will be available. This means that if a capital gain arises on the sale, PRR will exempt either all or part of the gain from Capital Gains Tax (“CGT”).

If you have more than one private residence, you can make an election to nominate one of your residences as your PRR. Please see our previous blogs for further details.

However, one point that taxpayers may not be aware of is that a rented property can class as a residence for the purposes of PRR. This is because if you have an ‘interest’ in a property, which includes any legal or equitable interest from being the owner of the freehold to signing up to a minimal tenancy agreement, the property falls within the definition of a residence.

As an example, this may be relevant if you rent a property near to your work (where you live during the week) and you own a property in a different location (where you live during the weekends and holidays).

Note: if you are living in a property under a licence (such as in a hotel or lodgings or with family or friends) you would not have any legal or equitable interest and therefore the property should not class as a residence for the purposes of PRR.

In line with the above, a PRR election may therefore be necessary even if you only own one property. This is because the rented property may be your main residence based on the facts of your circumstances and if no election is made this would mean that the sale of the property that you own (where a capital gain may arise) may not attract PRR, which could result in a capital gains tax liability for you.

PRR elections should normally be made within two years of the date that you have a new combination of residences. As mentioned above, please see my previous blog for further details. However, in this circumstance it may be possible to make a late PRR election if all but one of your residences has a negligible market value. This may be applicable where you own one property and rent one property.

If you are unsure of whether you need to make a PRR election or require assistance with making this, please contact a member of our team and we will be happy to discuss this with you.

Contact us today to discuss your tax requirements.
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