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November 26th 2019

CGT Private Residence Relief reforms likely to impact "accidental landlords"

The draft Finance Bill 2019/20 includes two major changes to Capital Gains Tax Private Residence Relief (PRR) that could see many property owners facing significantly higher tax bills if they sell up after 5 April 2020.

What are the current rules?

PRR exempts from Capital Gains Tax (CGT) gains on the sale of a property that is the taxpayer's only or main residence. PRR provides full relief from CGT for gains attributable to the years you’ve lived in the home and in addition, the last 18 months of ownership - even if you weren’t living there at the time.

PRR is only available in respect of gains attributable to periods when the property was (or was deemed to be) the taxpayer's only or main residence. However, where the property in question qualifies for PRR because it was initially the taxpayer's main residence, a further relief known as Lettings Relief can be claimed to exempt from CGT up to £40k of gains attributable to periods when the property was subsequently let out. Lettings Relief is therefore currently worth up to £11,200 to the taxpayer.

How are the rules changing?

The proposed reforms to PRR and Lettings Relief will impact disposals made on or after 6 April 2020, and the tax consequences may be severe, especially for many current and former landlords who will lose the ability to claim Lettings Relief and therefore face significantly higher CGT costs.

The main change to PRR is that the final period exemption of 18 months will be cut in half to nine months. For taxpayers who did not occupy the property as their only or main residence in the months immediately prior to sale, this will effectively increase the amount of any gain chargeble to CGT.

The proposed reform to Lettings Relief will mean that, for disposals on or after 6 April 2020, the relief will only be available in circumstances where the taxpayer has shared occupancy of the property with their tenant (although it can’t be a self-contained annex of the house, such as a granny flat). The tenant must share occupancy for a residential purpose - you couldn’t rent a room as an office space, for example.

The tax consequences for some property owners will be drastic. Have a look at this example:

Mary, a higher rate taxpayer, bought a house in April 2010 and lived there until April 2015 when she moved to a new home. She then rented out the house, and the tenant has stayed in there ever since. Mary now plans to sell the house in March or April 2020 and she expects to make a gain of £120k. What would be the difference in the CGT bill depending on if she sells on 31 March, or 30 April 2020?

Sale on 31.03.20Sale on 30.04.20
Gain120,000120,000
PRR relief 60 months plus 18/ 9 months (78 months/ 69 months)-78,655-69,000
Gain after PRR relief41,34551,000
Lettings Relief-40,000n/a
Chargeable gain1,34551,000
Potential CGT bill at 28%37714,280

Based on the draft legislation, if Mary decides to sell on 30 April rather than 31 March 2020, the combined effect of the reduction in the "deemed ownership" period from 18 to nine months, and the complete loss of entitlement to Lettings Relief, will increase her CGT exposure by up to £14,000.

If you are thinking of selling your house, particularly if you have moved out and it is currently let, then please get in touch for advice and assistance with the matters discussed in this article.

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