Capital Gains Tax (CGT) Private Residence Relief (PRR) is one of the most valuable UK tax reliefs. It is also one of the easiest to misapply. The rules look simple on the surface - any gain you make on the disposal of your main home is usually exempt from CGT. However, there are a number of scenarios that can create unexpected tax exposure.

Two of the most common examples involve retaining and renting out a property after moving out and operating a business from home.

The rest of this article walks through how PRR works, why these pitfalls arise, and how to think strategically about them.

How PRR works

PRR exempts the gain on a property for any period during which it was your only or main residence. If you live in the home throughout ownership, the gain is normally fully exempt. In these circumstances, the relief would normally be automatic and would not need to be claimed.

However, the relief is time apportioned. If the property was not your main residence for part of your ownership, the gain is split between exempt and taxable periods. There are additional periods of exemption added into the equation. Most commonly, these include the final 9 months of ownership regardless of its use in that period, and some initial periods of ownership where works are carried out in preparation for moving in. This is where the complications begin.

Renting the property after moving out

Renting out your former home is extremely common. However, it can sharply reduce PRR. This should always be considered as part of the analysis when deciding whether to rent out a previous home.

This is even more important in times (like now) of little or no increases in property values. In these situations, gains that would otherwise be exempt from CGT can become subject to more tax the longer the property is rented.

This has become even more of an issue alongside some of the restrictions on the ability of landlords to empty their properties quickly for sale within the Renters Rights Act.

Operating a business

We should be clear - simply having a home office that you use to work from home is unlikely to restrict PRR on a subsequent sale of your home. However, having part of your home exclusively used for the purposes of running and operating a business could do so.

Situations like that are rare. More commonly, we might be referring, for example, to a shop with a flat above where the owner resides.

As is always the case, the most important thing is to get the right advice. If you are moving out of your home and are tempted to retain it as a buy-to-let investment, speak to a tax adviser. Make sure that whatever decision you take, you fully understand the long-term implications.l