In the 2018 Autumn Budget, the UK government announced plans to make changes, effective from 6 April 2020, to principal private residence (PPR) relief from capital gains tax (CGT) – sometimes referred to as private residence relief (PRR) or main residence relief.
The changes relate to the final period exemption, and lettings relief. On 1 April this year, HMRC published a consultation paper, the outcome of which was published, along with draft legislation, on 11 July 2019.
On disposal of a property which has been occupied by an individual as their only or main residence, any capital gain is usually relieved in part or in full from CGT by PPR relief. PPR relief exempts any gains made in periods of both actual occupation where the owner was residing in the property, and deemed occupation where the owner was physically absent from the property but treated as if they were in occupation.
For non-exempt periods of absence, any gain is time-apportioned against the whole period of ownership period.
One key period of deemed occupation is the final period of ownership. The current CGT PPR rules provide that as long as the owner has occupied the property as their main residence at some stage, then the final 18 months of ownership is treated as exempt deemed occupation for PPR relief.
The purpose is to give individuals a CGT-free period in which to sell a property, once they have given up occupation.
A separate relief can apply to periods where a property was let out, and the owner was not in occupation or deemed to be in occupation. This is called lettings relief and can be available in addition to PPR relief. Where lettings relief applies, gains arising during the let period can be reduced by up to £40,000.
There are two main changes taking effect from 6 April 2020:
- The final period exemption for PPR relief is to be reduced from 18 months to 9 months (note: special rules giving those with a disability, and those in care, a final period exemption of 36 months will still apply).
- Lettings relief will be restricted to situations where the owner was in shared occupation with the tenant.
According to the government’s summary of consultation responses, the majority of respondents were of the view that the period of nine months was too short. Regional variations in the length of time it can take to sell a residence, and the complexity of divorce and separation, were cited as reasons justifying a longer final period exemption.
However, the government’s view is that nine months is an appropriate length of time to sell a property, while not being long enough to allow large amounts of tax relief to accrue on two properties.
The majority of respondents also opposed the reforms to lettings relief, which would remove lettings relief already accrued under the current rules. It was also felt that landlords were not being given enough time to prepare for the changes. However, the government noted that landlords were free to reorganise their affairs under the current rules, including disposing of their property prior to 6 April 2020.
In addition to the main changes above, the government will also legislate to amend three technical aspects of the PPR relief rules relating to: (1) nominations of a property as main residence outwith the current two-year nomination period; (2) job-related accommodation relief; and (3) inter-spousal transfers. In general, those who responded to the consultation were in favour of the technical changes.
The legislation will be introduced in the Finance Bill 2019. The technical aspects of the draft bill are open for comment until 5 September 2019.