Budget 2018 included the news that HMRC wants to ensure a better focus is given to the CGT relief enjoyed by those who make gains from selling their own homes: private residence relief.
HMRC’s ‘better focus’ of the principle private residence relief (PPR) 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. The details are set out in the consultation document ‘Capital Gains Tax: Private Residence Relief: changes to the ancillary reliefs’, published by HMRC on 1 April 2019.
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” (Budget Brief 2018), but that will be of small comfort for those taxpayers unfortunate enough to find themselves involved in a ‘non-average’ transaction.
There is 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 (TCGA 1992 s 225E).
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” (consultation document, para 4.1).
The current legislation (TCGA 1992 s 223(4)) 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.
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, it is always worth checking whether one of the other extensions to private residence relief applies, for example, if the owner moves into job-related accommodation or temporarily works abroad and lets the property for that period.
The consultation also proposes three ‘technical’ changes to private residence relief.
The first is 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.
HMRC proposes putting extra-statutory concessions ESC D21 and ESC D49 onto a statutory footing.
ESC D21 enables those who acquire a second residence to make a late claim as to which residence should be considered their main residence under TCGA 1992 s 222(5) where they were unaware a claim could be made: for example on moving into rented or job-related accommodation.
ESC D49 caters for a delay 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.
In both cases, the proposed legislation will mirror the current concessionary position.
The final proposed change relates to how the private residence relief rules operate when a property is transferred between spouses or civil partners.
Currently, where a main residence is transferred from one spouse to another, the transferee spouse inherits the transferor’s period of ownership, irrespective of whether the transferee has actually occupied the property as a main residence for that period.
For example, if H lives alone in a house as his main residence before getting married, then transfers 50% of the property to his spouse (W), which they both then live in as their main home. On a future sale of that property, both H and W will benefit from private residence relief on the full gain which is split equally between them, even though W has not occupied the property as her main residence throughout H’s ownership period.
The position is different if the property is not used as a main residence at the time of the transfer. In that case, the transferee’s period of ownership commences with the date of the transfer. In the example above, if H wasn’t living in the property as his main residence at the time of the gift to W, but they took up occupation at a later date, private residence relief would apply only from the date of occupation.
In the interest of ‘fairness’, from 6 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. The example given in the consultation documents is:
“George purchased a buy-to-let in 2010. In 2016 he married Nigel. From 2017, they lived in George’s buy-to-let as their main home and George transferred his 100% of the property to Nigel immediately before they moved in. No CGT was due on the transfer because George and Nigel are married. The property was sold in 2020 and under the current rules would qualify for full exemption from CGT because during Nigel’s period of ownership the property had only been used as his main home.”
The proposed changes would mean that in this example Nigel would be treated as owning the property from 2010. However, only the gain accruing for the period from 2017 to 2020 would be exempt from CGT as the property was his PPR in that period.
You can respond to this consultation by email to [email protected] by 1 June 2019, or post your comments below.