When you own a property that was previously used as your Principal Private Residence (PPR) and you later rent it out, it’s essential to understand how this transition affects your tax liability. In this scenario, the impact on Principal Private Residence (PPR) tax relief, a significant tax advantage, should not be overlooked.
We will cover:
- How you can benefit from PPR relief
- Tax implications of selling your property
Explaining PPR Relief
Principal Private Residence Relief is a tax relief offered to homeowners when they sell a property that has served as their main residence during the period of ownership.
However, if the property hasn’t been the owner’s primary residence throughout ownership—for instance, if it has been let out—then the PPR relief might need to be adjusted.
This adjustment isn’t required for the final 9 months of ownership if the property had been a PPR at some point.
Additionally, there are specific “deemed periods of occupation” where you’re considered to still be living in your property, even if you aren’t, and these don’t restrict the availability of PPR relief. These periods are:
- When you are abroad due to employment, for an unlimited time period.
- When you are temporarily absent from the property because you’re working elsewhere, either as an employee or a self-employed trader, for a maximum of four years.
- When you are absent from the property for any reason, up to a maximum of three years.
Remember, these periods only count as “deemed occupation” if you lived in your house both before and after the absence.
An Example to Consider
Let’s consider Karen, who sells a house she has owned for 3,000 days on January 20, 2023.
For the last 650 of those days, she rented the property to a third-party tenant, and she made a £600,000 gain on the property.
In this case, 2,625 (the number of days rented out, excluding the last nine months) out of 3,000 of the gain—or £525,000—should qualify for PPR relief.
This leaves £75,000 still chargeable.
As a residential gain, any remaining gain after Karen’s annual exemption will be taxable at 28% (assuming Karen is a higher rate taxpayer).
However, if Karen had moved back into the house, she could utilise the three-year absence rule, as 650 days is less than three years.
Consequently, no restriction would apply, and full PPR would be available, yielding a more advantageous tax situation.
With the abolition of lettings relief (for most cases) from 6 April 2020, this aspect has become even more pertinent.
While the tax savings need to be substantial enough to change homeowners’ behaviour—such as a £21,000 saving in Karen’s case—we believe understanding this position ahead of a sale can position homeowners to optimise their tax situation.
Being informed about tax implications prior to the sale allows property owners to make changes that could improve their financial outcome.
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Kind regards Ilyas