What contractors need to know about Private Residence Relief

Private Residence Relief (PRR) is perhaps one of the best tax reliefs, allowing a person to sell his or her main residence without triggering a liability to capital gains tax.

But as with most reliefs, its availability is contingent on certain conditions being met, writes Matt Fryer, managing director of contractor services provider Brookson Group.

Under Private Residence Relief, what is a person’s main residence?

PRR applies to the disposal of a person’s 'principal' residence. To qualify for relief, it is necessary to show that the property has been occupied as a “residence” where there is a degree of “permanence continuity and expectation of continuity.”

Generally, HMRC looks at the quality of the occupation rather than the length of the period of residence, so at least, this involves not only sleeping there but actually “living” and spending leisure time there.

The importance of giving HMRC notice

Where a person has more than one residence, he or she can choose which one is the main residence for the purposes of the relief. This can be done by giving notice to HMRC within two years of the time you occupied an additional property as your residence, or the time you changed your combination of properties occupied as residences.

In the absence of such a notice, the matter is decided on the facts of each case, but it is sensical to nominate the property that you expect to make the largest gain when you come to sell it.

Are there any PPR pitfalls for PSC contractors to be aware of?

The key pitfall that contractors should be aware of is the restriction to PRR where there is exclusive business use of part of your own home. This includes relevant adjoining buildings, such as a garage or outbuilding used as part of the household.

Many contractors working via their Personal Service Company (PSC) also work from home either on an informal or a full-time basis and most will opt to make a claim for expenses. But it is important to note that, although the exclusive business use of part of the house may mean that it is possible to claim tax relief for more of the household expenses, it will restrict capital gains tax relief on the sale of the house.

The key word here is “exclusively” and relief is only denied in respect of that part of the property that is used exclusively for business use. Where there is exclusive business use, any gain arising on the sale of the property must be apportioned and the proportion relating to exclusive business use is charged to tax. Where there is non-exclusive use, the permitted deduction is reduced as costs must be apportioned between business and non-business use.

How can you protect your Private Residence Relief?

As noted above, relief is only lost where there is exclusive business use of part of the property. To protect the exemption, all that is necessary is to ensure that any part of the home that is used for business purposes is also available for private use. For example, a room used as an office from which to run the business during the day, could also be used for by other members of the family in the evening, for school homework for example.

By ensuring that rooms used for business are also available for domestic use, it is possible both to work from home while ensuring that Private Residence Relief remains available for the whole property.

Final thoughts on PRR for contractors

Generally, it would be preferable for a room not to be given over solely to business use, as this could result in a restriction on the capital gains tax principal PPR relief-claim on sale. This should be balanced, though, with having an office used exclusively for business purposes and being able to claim full entitlement to expenses.

It is also worth pointing out that the gain relating to the use of one room may be below the annual CGT exempt amount and not be charged. If you have any concerns with regards to your entitlement to private residence relief, we advise that you liaise with your accountant to discuss relief, specific to your personal circumstances.

Wednesday 29th Nov 2023
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Written by Matt Fryer

Matt is a Chartered Tax Advisor with 18 years' experience of advising on tax planning and compliance. Matt has been with Brookson since 2009, having previously worked for Big 4 accountants, KPMG and PwC. Matt’s primary role is to ensure that the services provided by the Brookson Group comply with relevant legislation and regulatory requirements. Matt is also a Board member of the FCSA, the UK's leading membership body dedicated to promoting supply chain compliance for the temporary labour market.

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