The tax-free gains made when selling your own home came under fire in the Budget, with two changes to restrict the scope of the capital gains tax (CGT) relief for the main residence.
A gain made on selling a residential property is subject to CGT at 28% (18% for basic-rate taxpayers). However, the gain relating to any period in which the owner occupied the property as their main home is exempt (aka principle private residence relief: PPR). This PPR exemption is extended in a range circumstances where the owner may not have been in occupation. Two of those extensions to PPR are under attack in this Budget.
Where the property has been let at any time, each owner can claim lettings relief to reduce the taxable capital gain. This relief can cover gains of up to £40,000 per owner, but it is only available if the property has been the owner’s main home for a period. The relief is also capped at the amount of PPR relief due for the period of actual occupation by the owner.
The government is proposing to restrict lettings relief to cover only periods in which the owner is also occupying the same property “in shared-occupancy”. This seems to undermine the whole point of CGT lettings relief, as if the owner is in occupation then the gain for that period of ownership is covered by PPR anyway.
Homeowners who move and then let out their former home will be hit by this change in CGT relief.
Last few months
Sometimes the homeowner moves out of their home before it is sold. If they leave the property before contracts for the sale have been exchanged, the gain accruing for the final period when the owner is not occupying the property, and a sale has not been agreed, would be subject to CGT.
Currently, PPR relief is extended for 18 months to cover that last period of ownership. This last period relief was reduced from 36 months in April 2014, but the 36 month period of PPR exemption was retained for owners who move into a care home or who are disabled.
The government is proposing to cut the PPR exemption for the last period of ownership (when the owner is not in occupation) to just nine months. However, the 36-month exemption period will be retained for disabled owners or those who live in residential care.
These changes to capital gains tax (CGT) are due to come into effect from 6 April 2020, but there will be a consultation on the details first.
Need a handy summary of all the major measures from Budget 2018? Visit our at a glance guide.
About Rebecca Cave
Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.