The 2018 Budget proposed changes to Principal Private Residence relief (PPR) which in turn affects whether or not an individual is liable for capital gains tax (CGT) on disposal of a property. On 1 April 2019 HMRC published a consultation document, which is due to close 1 June 2019. The government will subsequently publish its response and draft legislation in summer 2019.
Taxation of Chargeable Gains Act 1992 s222 –s226 addresses the capital gains provisions for disposal of a private residence. PPR keeps main residences out of capital gains tax (CGT) so when individuals sell their main residence, they do not have to pay CGT on any gains made in that sale.
To protect gains made by people in certain circumstances, there are several ancillary reliefs that extend the benefit of PPR beyond those who are occupying their main residence.
For example, when somebody is absent from their main residence for any reason, the gains they make for up to three years are protected - s223(3)(a); working abroad for the reason of employment - s223 (3)(b); working elsewhere - s223(3)(c); letting relief - s223(4); and final period relief - s223(2).
Changes to ancillary reliefs
To ensure that PPR is better focused on owner-occupiers, from April 2020 the rules on two ancillary reliefs will change.
HMRC is seeking views on the following changes to the ancillary reliefs:
1. Final period exemption being reduced from 18 months to nine months - s223(2)
- Currently, the owner does not have to pay CGT on gains made in the final 18 months of ownership. However, this means that owners can accrue relief on multiple properties. This is at odds with the intent of the relief, to protect those who wish to move into a new property but are unable to immediately sell their old one.
- From April 2020, the exemption will be reduced to nine months. The existing relief for those with a disability or moving into social care will remain at 36 months.
2. Lettings relief only permitted in cases where the owner remains in ‘shared occupancy’ with the tenant.
- Currently, lettings relief provides up to £40,000 of relief (£80,000 for a couple) to those who let out a property that is, or has been in the past, their main residence.
The initial aim of this relief was to enable people to rent out spare rooms easily, but has since been used for relief in cases where a whole property is let out (provided the property was at some point the owner’s main residence).
- From April 2020 the relief will change and only be available to those who are in shared occupancy with a tenant.
The current rules provide that where one spouse makes a transfer of their only or main residence to the other, the receiving spouse’s period of ownership of the dwelling is the same as that of the transferring spouse, even if that period started before marriage. The receiving spouse also qualifies for PPR for any period before the transfer that the property was the only or main residence of the transferring spouse, so long as the property is the couple’s only or main residence at the time of transfer.
So, if one person owns a property for many years and on marriage his/her partner moves into the property and lives in the house as their main residence, the rules ensure that full PPR is available on the full disposal proceeds for both spouses.
However, where a property was not the main residence at the time of transfer, for the receiving spouse the period of ownership over which any PPR is calculated starts from the date an interest in the property was transferred up to the date of sale.
In certain cases, these rules can mean that PPR can be claimed for the whole gain, resulting in no CGT being due, even where the property was previously let out and was not used as a main residence.
- Person A purchased a buy to let property many years ago
- if A marries B and, on marriage, A transfers full ownership of the property to B, no CGT is due on transfer as A and B are married
- if, immediately after transfer, B moves into the property and they both live in the house as their main residence, on a subsequent disposal by B there would be no CGT because the property was B’s main residence throughout the whole period of ownership.
These rules can also work by denying PPR on a property that may have been used as a main residence in the past, but is not so used at the date of transfer, to a spouse who never uses it as a main home. This may be the case, for example, where a property which was a residence in the past is let out at the date of transfer and afterwards. In such cases, CGT would be due on the full disposal proceeds.
- Person C owned a property for many years and used it as his main residence
- before his marriage with D, they both took up residency in D’s house while C’s house was rented out
- after the wedding, C transferred 50% of his rented house to D
- no CGT was due on transfer because C and D are married.
- on future disposal, C would be able to claim PRR on his share of his gain (including final period exemption)
- however, as D only used the property for letting purposes during the period of ownership his/her share of the gain will be subject to CGT with no PRR being available.
The government is considering whether these outcomes should be reformed and made fairer, so that the receiving spouse should always inherit the transferring spouse’s period of ownership and the use to which the property was put during that time.
In the examples above, if we took into account the transferring spouse’s ownership and use of the property:
- B would be prevented from being able to claim full PRR; and
- D would be allowed to claim an element of PRR based on his/her spouse’s historic use of the properties.