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 or main residence relief. The changes relate to the final period exemption, and lettings relief.
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.
Periods of absence are covered by two main reliefs: final period of ownership relief and lettings relief:
- Final period of ownership relief currently provides PPR exemption for the final 18 months of ownership, irrespective of whether you continue to live in the property. So for example it will apply for that period if the property is empty, or even if it is rented out, provided it has been your PPR at some time during your ownership. This is intended to give the owner time to market and sell the property.
- 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.
Both reliefs will be restricted for property sales after 5 April 2020.
How are the tax reliefs changing?
- Final period of ownership relief reduces from 18 months to 9 months
The 9-month restriction period will come into force on all disposals made from 6 April 2020 onward. It is important to note that the property sale date for capital gains tax purposes is the date of exchange of unconditional contracts and not the date of completion.
Any taxpayers who are registered disabled or who are moving into social care won’t be affected, their entitlement to PPR will remain at the original 36 months.
- Lettings relief is restricted unless the owner is in ‘shared occupancy’ with the tenant
Currently, PPR lettings relief provides up to £40,000 of relief (or £80,000 for a couple) to those who sell a property which has been their PPR and has also been rented out. The relief applies whether a single room is rented, or the whole property.
From 6 April 2020, lettings relief will be restricted and will only be available to those who are in shared occupancy with a tenant e.g. where they are renting out rooms to lodgers but also remain living in the property.
Please note: the current annual CGT allowance of £12,000 per taxpayer can also be used to reduce any remaining gains on a property sale. Note that this annual CGT allowance cannot be carried forward if unused nor can it be backdated. If unused during the relevant tax year, the allowance is lost.
Payment of CGT from 5th April 2020
Just as a reminder that from 5th April 2020 you will be required to submit a provisional calculation of any gains made from the sale of a residential property AND pay any tax due within 30 days following completion of the sale. Ultimately the gain will be recorded on your self-assessment form (if you are not registered for self-assessment – you have to register) with an adjustment made for any additional tax that is due or recoverable. You have to wait until the submission of your return before obtaining a recovery if you have accidentally overpaid.
If you have any questions or concerns just get in touch.