Partial PRR with Business Use: A Case Study & 2026/27 Rules

Explore Partial PRR with Business Use in this guide, especially for the UK. When advising clients who operate a business from their home, practitioners must carefully navigate the Private Residence Relief (PRR) restriction rules. Section 224(1) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) dictates that if part of a dwelling-house is used exclusively for the purpose of a trade, business, profession, or vocation, the capital gain must be apportioned.  Relief under sections 223 and 223B then applies only to the part of the gain apportioned to the residential, non-business use.

Crucially, the statutory test hinges on exclusive use. HMRC’s interpretation of this test is exceptionally stringent.  If a room has even a minor measure of regular residential use, it does not trigger the restriction.

“The exclusive use test is a stringent one and you should not usually seek any restriction to relief for a room which has some measure of regular residential use. But occasional and very minor residential use should be disregarded.”

For example, a farm kitchen used for business admin but also for domestic meals remains part of the residence, retaining full PRR regardless of whether the farmer claims business expenses for that space.  However, an office or dairy used strictly for business requires apportionment.

Partial PRR with Business Use: A Case Study

To illustrate the mechanics for the 2026/27 tax year, consider a client, Sarah, who sells her property in July 2026. She bought the property, which contains ten equally sized rooms, completing the purchase in July 2016. Practitioners must note that for PRR purposes, the period of ownership commences at the completion of the purchase, rather than the exchange of contracts.

Sarah used two of the ten rooms exclusively as a veterinary surgery throughout her entire 10-year ownership period. The remaining eight rooms constituted her main residence. She realises a total capital gain of £200,000 net of costs.

1. Apportionment of the Gain

HMRC states that apportionment is a question of fact.  While the Valuation Office Agency (VOA) handles material or complex cases by valuing the respective parts, HMRC accepts reasonable apportionments based on floor area or room count for standard cases.  HMRC explicitly rejects the simplistic approach of deducting a separate residential valuation from the total proceeds.

Using a reasonable room-count apportionment:

• Total Rooms: 10
• Business Rooms: 2 (20%)
• Residential Rooms: 8 (80%)

2. Calculating the Chargeable Gain

The gain is split according to the exclusive use. The residential portion receives PRR, while the business portion is fully chargeable.

3. Applying 2026/27 CGT Rates

For the 2026/27 tax year, the government has unified Capital Gains Tax rates. The rates are now 18% for the basic rate band and 24% for the higher rate band across all property gains (excluding carried interest).  Practitioners no longer need to distinguish between ‘residential’ and ‘non-residential’ surcharges for the business part of the home. Assuming Sarah is a higher-rate taxpayer and has already utilised her annual exempt amount, the tax calculation is straightforward.

• Chargeable Gain: £40,000
• Tax Rate (Higher Rate): 24%
• CGT Payable: £9,600

Partial PRR with Business Use – Adjustments for Changes in Use Over Time

In reality, business use often fluctuates. A client might convert a residential bedroom into an exclusive office halfway through their ownership period.

Section 224(2) of TCGA 1992 provides the statutory mechanism for this scenario. If there are changes regarding the use of part of the dwelling-house for business purposes during the period of ownership, the relief given by PRR may be adjusted in a manner which is “just and reasonable”.  In practice, this requires a time-apportioned calculation applied to the specific spatial area that underwent the change in use.

Consider researching the specific interaction between the unified 2026/27 capital gains tax rates and Business Asset Disposal Relief (BADR) to determine if the 14% rate could apply to the business-apportioned gain on a home office.