Private Residence Relief - All Change

Arguably one of the most important and generous reliefs from UK capital gains tax (CGT) is the exemption available for the disposal of an individual’s home. In straight forward cases where someone owns one property in which they have always lived for the whole period of their ownership any gain arising is completely exempt from a CGT charge.

However modern life is never that simple. People are much more socially mobile these days and are prepared to move either temporarily or permanently for a variety of reasons. This can often lead to short term absences from wherever they regard as home. Longer term absences may mean owners look to rent their property, rather than letting it sit empty. 

In addition, when looking to move house it is sometimes difficult to sell and buy contemporaneously so again, owners may consider short term letting as a solution. A relationship break-up can also lead to one partner moving out but retaining ownership of a property for some time even though it is no longer their home. All these situations put the CGT exemption under threat.

What is the current position?

The tax system has always recognised these issues and flexibility has been built into the exemption in an attempt to accommodate this. For instance the final 18 months of ownership of a property which at anytime has been your principal private residence is exempt from CGT regardless of its use within that period. This accommodates the short term letting and issues on separation. It is also possible to ignore temporary absences due to work commitments where the property isn’t let.

Finally, by way of an encouragement for people to actually rent out their property rather than leaving it empty there is a further lettings exemption which can remove up to a further £40,000 of gain from charge. 

Why the proposed changes? 

It has to be said that at times of property inflation there is a temptation to deliberately delay a sale and rent the property out temporarily to access these further exemptions. Maybe in response to this the Government have made changes to the rules which come into play on 6 April 2020. 

What are the main changes? 

Firstly the final period exemption is to reduce from 18 months to nine months. In addition the lettings relief will only apply where the owner of the property is in occupation at the same time as the tenant. In other words, you are renting out rooms in your home rather than the whole of the property. This makes the relief very restrictive. 

What if I already qualify for the relief under the existing rules? 

There will be no ‘grandfathering’ of the rules so from 6 April 2020 you will simply look at the legislation in force at that time. Many people who may be expecting to be able to claim additional exemptions will immediately lose out.

What action can I take to secure the existing reliefs? 

There is a window of opportunity to remain within the old rules should this prove advantageous. For instance, it may be possible to crystallise a tax charge before 6 April 2020 using a settlor interested trust or by exchanging contracts with a long completion date. Remember the date of disposal for CGT is normally the date of exchange of contracts not the date of completion. But expect HMRC to look very closely at this and if a significant advantage is being obtained they may well challenge what they see as artificial arrangements. 

What else is changing?

The final sting in the tail is that also from 6 April 2020 the date of payment of CGT is changing. Any tax arising must be paid within 30 days of completion; this is regardless of whether you file annual tax returns under self assessment. Another reason to think about taking action before the end of this tax year if appropriate.

For more information please get in touch with Stuart McKinnon.

Private client compass

Private client compass

Helping you to navigate the tax landscape with a range of tax planning ideas and opportunities.