Private residence relief can be denied when a home is bought, or money is spent on it, for the purpose of making a gain on its sale. Section 224(3) of the Taxation of Chargeable Gains Act 1992 removes relief on the whole gain if the purchase itself was wholly or partly for that purpose, and removes relief on the part of the gain attributable to the spending if only the later expenditure was. HMRC applies it where the primary purpose was an early sale at a profit, and it will usually look first at whether the project was a trade.

What does section 224(3) say?

Section 224(3) has two limbs. CG65200 summarises them: relief is excluded where a dwelling house is acquired wholly or partly for the purpose of realising a gain from its disposal, and where there is later expenditure on the house wholly or partly for that purpose. Under the first limb no relief is due on any gain from the disposal. Under the second, relief is denied only on the part of the gain attributable to the expenditure.

HMRC describes the aim of the relief in the same paragraph: it exists so that the whole sale proceeds are available to buy a new home of a similar standard. It is not intended to relieve speculative gains or gains from development. The general rules of the relief are in private residence relief explained.

Does hoping your home will go up in value count?

No. CG65210 accepts that almost everyone who buys a house hopes to make a gain eventually, and may choose one house over another because it is likely to appreciate. HMRC says it would be unreasonable to restrict relief in those cases. The subsection should only be applied where the primary purpose of the acquisition, or of the expenditure, was an early disposal at a profit.

Ordinary improvements made to live in a house, such as a new kitchen or an extension you intend to enjoy, are not caught simply because they also add value. The question is why the money was spent. HMRC also tells its officers to ignore the cost of obtaining planning permission and of releasing a restrictive covenant (CG65243), because the gain attributable to them would be speculative and small, and the purchaser could easily be arranged to incur them instead.

What if the whole purchase was to renovate and sell?

If you bought a house mainly to do it up and sell it on, HMRC’s first question is not section 224(3) at all. CG65214 tells officers to consider whether the transaction was a trade or an adventure in the nature of trade before invoking the subsection, and CG65230 says a charge to tax on trading income takes priority over capital gains tax. That is why the first limb of section 224(3) is rarely applied. HMRC may argue trading and section 224(3) as alternatives, so that if a tribunal finds no trade, relief can still be denied because the purchase was partly to realise a gain.

The difference is significant, because a trading profit is taxed as income rather than as a capital gain. The distinction between dealing in property and holding it as an investment is explained in property developer or investor.

CG65220 notes one interaction. Section 517M of the Income Tax Act 2007 disapplies the rules in Part 9A of that Act for a sale of a private residence where the relief applies, or would apply but for section 224(3). HMRC says restrictions under section 224(3) most commonly arise where money has been spent reconstructing or redeveloping a building, and that the Part 9A rules can come into play once a trading venture is in point; section 517M keeps them away from your home in that situation.

What if you lived there only briefly?

A separate problem arises before section 224(3) is even reached. Relief needs genuine residence, and a short stay while renovating may not amount to it. In Goodwin v Curtis, summarised at CG64460, a taxpayer occupied a farmhouse for about a month before selling it. The courts upheld the finding that it was temporary accommodation, not a residence, because his occupation lacked a sufficient degree of permanence, continuity or expectation of continuity. The question is one of fact and degree.

So a person who moves into each project while the work is done, then sells, faces three possible HMRC arguments: no residence at all, trading, and section 224(3). Evidence of a settled home, such as the household moving in, post and registrations at the address and reasons for a later move, carries weight.

Which kinds of spending does HMRC target?

CG65243 says the two most common applications of the second limb are:

  • a leaseholder buying the freehold or a superior interest before selling, which releases marriage value (CG65251);
  • converting a house into flats to sell them separately (CG65265).

HS283 gives the same examples: buying a house to sell it quickly at a profit, or a tenant buying out the freehold to increase the profit on sale. In those cases HS283 says you need to give details on your tax return. A payment to a sitting tenant to obtain vacant possession before sale can itself trigger a restriction (CG65265).

How is the restricted gain worked out?

The legislation gives no method. CG65246 says HMRC compares the actual gain with the gain that would have arisen without the expenditure, usually with valuation advice from the Valuation Office. The part attributable to the spending is chargeable, and it cannot exceed the total gain.

HMRC’s freehold example at CG65257: a leaseholder bought the lease for £60,000 and lived in the house. Before selling he paid £40,000 for the freehold and then sold for £250,000. The Valuation Office agreed the lease alone would have fetched £160,000. The £90,000 extra proceeds from adding the freehold, less its £40,000 cost, gives a chargeable gain of £50,000. The remaining £100,000 of gain is exempt.

HMRC’s conversion example at CG65270: a house bought for £100,000 as the owner’s only residence was converted into two flats at a cost of £50,000. They sold for £150,000 each. The unconverted house would have been worth £200,000. The gain attributable to the conversion is £300,000 less £200,000, less the £50,000 cost, which is £50,000. Without section 224(3), the whole gain would have been relieved, because the period after she moved out fell within the final nine months.

What else should you watch for?

  • Losses. A loss on a sale that would have been covered by the relief is not an allowable loss (HS283), so renovation projects that lose money do not generate relief either.
  • Partial occupation. If the house was your residence for only part of the ownership period, time apportionment applies as well as any section 224(3) restriction.
  • Flats you keep. In CG65271 HMRC notes that when the retained flat is later sold, part of that gain may also be attributable to the conversion.
  • Reporting. Where tax is due on a UK residential property gain, it must be reported and paid within 60 days of completion; see the 60 day property return.

If you buy a home that needs work before you can move in, the separate rule that can relieve the period before occupation is explained in PRR when you delay moving in.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.