Private Residence Relief (PRR) is a valuable tax relief that helps homeowners avoid paying capital gains tax (CGT) on the profit made when selling their main home. However, determining which property qualifies as your main residence can be complex, especially if you own more than one home. This guide will help you understand the rules and make informed decisions to maximise your tax benefits.

What is Private Residence Relief?

Private Residence Relief allows homeowners to exclude the gain on their main home from CGT. This means you don’t have to pay tax on the increase in value of your home while you live there. Even if the property was not your main residence for the entire period of ownership, the final nine months (or 36 months if you move into care) of ownership are also exempt from CGT. Certain other periods of absence can qualify for the relief.

Understanding Main Residence

If you have more than one home, you can only designate one as your main residence at any given time. For married couples and civil partners, only one property can be the main residence between them. Importantly, a property must be lived in as a residence to qualify—it cannot be a property you own but rent out.

Nominating Your Main Residence

When you have more than one residence, you can choose which one will be your main residence for CGT purposes by making a nomination. This choice is crucial because it affects which property gains the tax exemption.

Time Limits for Nomination

You must make your nomination within two years of acquiring a second home or any change in your combination of residences. For example, if you buy a second home or a previously rented property becomes your second home, you need to nominate your main residence within two years of this change.

Changes in Residence Combinations

If you acquire a new home or your living situation changes (like a tenancy ending and you moving into a previously rented property), you need to reassess and nominate your main residence again. The two-year clock starts ticking from the date when the combination of residences changes.

Marriage or Civil Partnership

When you marry or enter a civil partnership, the rules change. Previously, each partner could have their main residence. After marriage or entering a civil partnership, you must jointly nominate one main residence. If only one partner has multiple residences, no new nomination is needed. However, if both partners have multiple residences, a new nomination must be made within two years of the marriage or partnership.

Varying Your Nomination

Once a nomination is made, you can change it (known as ‘flipping’) to maximise tax benefits. You can backdate this change by up to two years. This strategy is often used when planning to sell one of the properties. By nominating it as your main residence for the last nine months (or 36 months if moving into care), you can benefit from the final period exemption, reducing your CGT liability.

What If No Nomination is Made?

If you don’t make a nomination, HMRC will determine your main residence based on where you live most of the time. This is decided by looking at the facts, such as where you spend the most time, where your family lives, and where you’re registered to vote or receive mail.

Example 1- Multiple Homes: John owns two homes: one in London and one in the countryside. He spends weekdays in London and weekends in the countryside. John buys the countryside home and has two years from this purchase date to nominate it as his main residence. If he does not make a nomination, HMRC will likely consider the London home his main residence since he spends more time there.

Example 2 – Marriage and Multiple Residences: Sophie and Tom each own a home before getting married. After marriage, they must decide together which home will be their main residence and nominate it within two years. If Sophie spends most of her time in her city apartment and Tom in his suburban house, they need to discuss and agree on which one to nominate based on their circumstances and potential tax implications.

Example 3 – Flipping for Tax Efficiency: Emma has two homes and plans to sell one. To maximise her PRR, she nominates the property she plans to sell as her main residence for the nine months before the sale. This way, she can take advantage of the final period exemption and reduce her CGT bill.

Deciding which home is your main residence can significantly impact your tax liability when selling a property. By understanding the rules and planning your nominations, you can ensure you maximise your Private Residence Relief and minimise your capital gains tax. Always keep detailed records and consider seeking professional advice to navigate the complexities of these decisions effectively.