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Private Residence Relief

HMRC are looking to change tax relief on homes

The 2018 budget included the news that HMRC wants to review the Capital Gains Tax (CGT) relief enjoyed by those who make gains from selling their own homes known as private residence relief.

HMRC’s review of the principle private residence relief (PPR) if implemented will: reduce the final period exemption from 18 months to nine; and restrict the application of lettings relief only to where conditions on ‘shared occupancy’ are met.

HMRC estimates that these changes will net the Treasury £470m over the next five years, with the changes taking effect from 6 April 2020.

Reduction of the final period exemption

Extending private residence relief to the final period of ownership enables taxpayers to sell a former home with the full benefit of the relief, even if they have already moved into a new residence when the sale takes place, provided the former home had been occupied as a main residence at some time in the period of ownership.

The final period exemption was reduced from 36 to 18 months in April 2014 and HMRC has proposed reducing this further to nine months from April 2020. HMRC notes that the nine-month window is “still twice the length of an average property transaction”, but that will be of small comfort for those taxpayers unfortunate enough to find themselves involved in a ‘non-average’ transaction, such as the many thousands each year who buy a plot of land and build their own home.

There is however a welcome exception for the disabled or those moving into a long-term care-home, where the final period exemption will continue to be 36 months.

Lettings relief

This relief was introduced nearly 40 years ago and was designed “to ensure people could let out spare rooms within their property on a casual basis without losing the benefit of PRR. This may be, for example, where there are a number of lodgers sharing the property with the owner”.

The current legislation refers to property having been “wholly or partly let … as residential accommodation” and makes no reference to ‘spare rooms’ or ‘sharing the property with the owner’. If HMRC had intended the relief only to apply in those circumstances it would have been easy enough to draft the legislation in those terms. For a more detailed explanation of the current lettings relief go to: https://www.gov.uk/tax-sell-home/let-out-part-of-home .

From 6 April 2020, lettings relief will be available only where the owner continues in occupation alongside one or more lodgers, and will not apply where the whole house is let. For many, this will increase the capital gains tax liability arising on the sale of a previously let property by £40,000. However, there are a couple of exceptions, such as if the owner moves into job-related accommodation or temporarily works abroad and lets the property for that period.

Other proposed changes to Private Residence Relief

HMRC have also proposed three other ‘technical’ changes to private residence relief.

    1. Armed Forces: They plan to extend the definition of ‘job-related accommodation’ to military service personnel, even if the accommodation they occupy is provided by, say, a private landlord rather than the Ministry of Defence.
    2. Extra-statutory concessions: HMRC proposes putting 2 existing extra-statutory concessions onto a statutory footing. Firstly to allow individuals who acquire a second residence to make a late claim as to which residence should be considered their main residence where they were unaware a claim could be made: for example on moving into rented or job-related accommodation.
      Secondly, delays in moving into a property intended to be the owner’s main residence: for example to allow refurbishment to take place. HMRC generally accepts that a delay of up to 12 months can be treated as a period of residence for the purposes of private residence relief, but will allow a longer period of up to 24 months in exceptional circumstances.
    3. Spousal transfers: The final proposed change relates to how the PPR rules operate when a property is transferred between spouses or civil partners. From 6th April 2020 HMRC proposes the transferee spouse should always inherit the transferor spouse’s period of ownership and the use to which the property was put during that time. This will prevent a transferee spouse taking advantage of PPR for a period when he or she did not own the property.

    Image of David Jones Shrewsbury Accountant and Founder of Morgan Jones

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