Changes ahead for homeowners
From April 2020, changes will be made to reliefs available when disposing of your main residence. These changes could result in a significantly increased capital gains tax bill depending on the timing of the disposal and history of occupation of the property.
Background
A disposal of your main home is generally exempt from capital gains tax where it has been your only or main residence throughout the entire period you have owned it. This is known as Principal Private Residence (PPR) relief. Partial relief for PPR may also be available, for example, where there have been period of absences from the property.
Below we have set out four scenarios highlighting the potential impact of the new rules.
1. Letting out a property which was previously your main residence
If you have let out your main residence for a period of the time owned, you may not get full PPR relief but could qualify for ‘letting relief’.
Currently, the gain relating to the period let can be reduced by up to £40,000 under this relief (and up to £80,000 for a couple where the property is jointly owned). From April 2020, however, letting relief will only be available where the owner is in shared occupancy with the tenant.
The consultation published on 1 April 2019 proposes that lettings relief will only be available for disposals post 5 April 2020 in periods where the shared occupancy condition has been met.
This measure will effectively abolish lettings relief for most people who have let out their home after moving out. This could result in up to £22,400 of additional tax.
2. Recently moved out of/will soon be moving out of your main residence
Homeowners currently have a final period exemption for PPR relief of the last 18 months of ownership regardless of whether they are in occupation at that time.
This period was reduced from 36 months in April 2014 and will be halved again to nine months from April 2020.
For someone that moved out of their house at the beginning of March 2019, their final period exemption will be effectively reduced to a maximum of 13 months if they sell by 5 April 2020 with a ‘cliff-edge’ drop to just nine months if they sell after this time.
In the policy document, the government comment that a typical house sale takes half this time again, which could be a hint at a further reduction in the future.
3. Transfer of property to a spouse
The consultation also includes proposals to change the rules on inter-spouse transfers. Currently the receiving spouse is deemed to acquire the property on the date of the gift, but only inherits the prior ownership period for PPR relief if it is the main residence at the time of the transfer. The proposal put forward is for the receiving spouse to always inherit the transferring spouse’s PPR history.
The current rules can give opportunities for gains that would not otherwise qualify to be covered by PPR relief. There may be opportunities for planning to minimise future gains using the current rules before the changes take effect.
4. Disposal of property post April 2020 – tax payment date
From April 2020, capital gains tax will be payable on disposals of residential property within 30 days of the sale. Currently this would normally be payable by 31 January following the end of the year in which the gain arose.
For example, an individual disposing of their main residence on 5 April 2020 would be liable to pay any capital gains tax due on 31 January 2021 (assuming full PPR was not available). If they were to dispose of it one day later, however, the due date would be more than eight months earlier (i.e. payable on or before 6 May 2020).
Action to take
Although these changes alone may not compel you to sell your property now, if you are thinking of selling in the near future there could be significant advantages of doing so prior to the rules change in April 2020.
If you would like further advice or assistance with the reliefs’ available, calculation of a potential capital gains tax liability and/or impact of the new rules, please get in touch with a member of our tax team.