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CGT: Changes proposed for relief on homes

10th May 2019
Tax Partner Newby Castleman LLP
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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).

Lettings relief

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.

Other changes

The consultation also proposes three ‘technical’ changes to private residence relief.

Armed forces

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.

Legislate concessions

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.

Spousal transfers

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.

Replies (13)

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By 123 Financials
11th May 2019 06:19

More exceptions to general rules! Why HMRC is working on a policy to MTC- making tax complex? Surely one objective for any Tax legislative or enforcement body is to MTS- making tax simple.

Thanks (1)
By tonyaustin
13th May 2019 10:19

My recollection (yes I am that old!) of the lettings relief is that it was also to cover the situation where a person let their house while working abroad and then replaced it on or before their return to the UK without ever making it their main residence again. They now can also buy a property when working abroad and make it their main residence when they return, which they will not be able to do if these changes go ahead. Certain periods of absence can only be disregarded if the house is occupied as the main residence both before and afterwards.

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By Swedish Chef
13th May 2019 11:09

"For many, this will increase the capital gains tax liability arising on the sale of a previously let property by £40,000."

Increase the gain, surely?

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Replying to Swedish Chef:
By Ken of Chester le Street
13th May 2019 13:37

Unless of course there is a change of government and the rate of cgt is 100%

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By DTB27
13th May 2019 11:16

Just wanted to check I am understanding the last part correctly (transfer between spouses). In the example given the property was not lived in, they then moved in and then sold. Only the period from moving in to date of sale got PRR.

I assume then that if the position was the other way round, lived in by A as main res, moves out and rents, gets married, then transfers property to H/W. H/W "acquires" A's PRR for the initial period despite never having lived there. Am I understanding that correctly?

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By Martin B
13th May 2019 11:49

CGT: Changes proposed for relief on homes
For future reference

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13th May 2019 13:03

''For many, this will increase the capital gains tax liability arising on the sale of a previously let property by £40,000''

This is not true!

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By cfield
13th May 2019 14:02

What they've done is snuff out a neat little trick where you could eliminate latent taxable gains (for example if the property hadn't always been your PPR) by transferring some or all of it to your spouse BEFORE he/she moves in and then live there long enough for the taxman not to be able to argue that it didn't qualify as a PPR "residence".

What that does is squeeze the whole gain since the property was acquired into the final period of residence, since the spouse would still inherit the base cost. If they live there continuously, even for just 2-3 years, the whole gain is PPR exempt.

It is a rather risky tactic though, as the taxman will fight tooth and nail to disallow PPR on the basis it was never intended to be an ongoing residence with the requisite degree of permanence and continuity. If he succeeds, then all the PPR is lost on the % of the property gifted.

When they talk about fairness, they mean fairness to the taxman, not to other taxpayers. A fairer solution would be for the transferee spouse to acquire the PPR history even if the transfer was made before he/she moved in. After all, the only reason they don't is because the first line of s222(7)(a) is written in in the present tense and Parliament may not have intended it to have that effect.

That would create a more level playing field, but it seems HMRC only quote that phrase when it suits them!

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By Ken of Chester le Street
13th May 2019 14:06

I note the consultation is still going on.
Take a taxpayer who moved into house in 1989, and it became her PPR. She moved house in 2001, and that became her PPR. She let the old house residentially. Under the old rules, she would have 12 years lettings relief, and 18 months relief at the end of ownership. from this, it would appear she has lost her lettings relief., and cost her £7200, assuming her cgt at 18%. This is unfair.
It would be fairer to apply the new rules from budget day, to preserve lettings relief up till then. This could be done on a time apportionment basis, or a rebasing to November 2018 on residential properties. Otherwise, we have retrospective taxation. We are not talking about arcane schemes of tax avoidance, in fact it is not avoidance at all, she is just an accidental landlady. There must be thousands like her.
Would it be legitimate avoidance to settle the property on her and her husband as joint tenants, with her to retain a life interest?

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Replying to Ken of Chester le Street:
By cfield
13th May 2019 14:34

Yes it is unfair, and they are moving the goalposts, but it is not retrospective taxation any more than the new rules against contractor loan schemes are retrospective. The tax applies to a present or future event; ie. the gain in the case of the landlady and the on-going loan in the case of the contractor.

They are also being disingenuous in saying that it restricts letting relief to owners still in occupation, as they know full well that most people with lodgers are exempt anyway. Even those with more than one lodger are exempt if it is not a business in the proper sense of the word (although the taxman will try to argue that 1 is the limit). House shares, for example, are exempt.

What they are really doing is restricting letting relief to Rigsby and his like. In other words, those who run what are effectively boarding houses.

Thanks (1)
Replying to cfield:
By Ken of Chester le Street
13th May 2019 15:41

Thank you for your interest. I am glad we agree that the withdrawal of the relief is unfair.
You have compared my understanding of whether this is retrospective or not is like the contractor loan scheme. A lot of people seem to think the latter actually is retrospective, or at least ,retroactive.:
When capital gains tax was introduced in 1965, it was designed to be effective from that date. There was either a time apportionment or you could elect to have the gain base on the increase from budget day value. This would be a preferrable approach.
I shall now search their website and see if they say anything about this development.

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Replying to cfield:
By Ken of Chester le Street
13th May 2019 16:04

I am glad you agree that the withdrawal of lettings relief is unfair.
On the issue of the relief is retrospective , it seems some people think contractor loan schemes are retrospective, or at lease retroactive, including the CIOT.

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Replying to Ken of Chester le Street:
By Ken of Chester le Street
13th May 2019 16:15

Sorry, I seemed to have duplicated part of my reply to you.
But I have found this, from CIOT:

Having retired some time ago, my own comment might not carry much weight. But I shall watch their site with interest.

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