For many, owning and selling their own home is thought to be tax-free but, as always, tax is never quite as simple as that.
Principal Private Residence (PPR) relief (colloquially referred to as ‘main residence relief’) is a set of tax rules which are designed to ensure that the sale of a person’s home is exempt under certain conditions. Generally, if you own one home, live in it and sell it, any gain will be tax-free but suppose you lived elsewhere due to a work secondment and let your old home out, then what?
The existing rules can be very complex but allow PPR relief for a number of specific absences from the property, including periods of letting. The government is making a number of changes to these rules and serves as a brief overview of these.
Broadly, all of the above changes apply to transactions undertaken from 6 April 2020.
These changes should be considered now, particularly where individuals are considering selling properties in the next year or so.
Change 1 – Lettings relief
Lettings relief was introduced to ensure that people could let out spare rooms within their property on a casual basis without losing the benefit of PPR relief. The government considers lettings relief extends much further than the original policy intention and also benefits those who let out a whole dwelling that has at some stage been their main residence.
The new rules state that where a gain arises on a person’s home then lettings relief may be due, where at any time in the individual’s period of ownership:
- part of the dwelling-house is the individual’s only or main residence; and
- another part of the dwelling-house is being let out by the individual as residential accommodation otherwise than in the course of a trade or business
Effectively, this means that lettings relief will not be available for those periods where an owner has moved out of the property and therefore no longer shares occupation with a tenant or tenants i.e. in the vast majority of cases. The changes effectively represent an end to the letting relief – worth as much as £11,200 in tax per owner on a relevant sale.
Example of where the letting changes have effect
Eric purchased a house for £200,000 on 1 January 2000. He sold it for £650,000 on 31 December 2020. During Eric’s 20 year (240 months) ownership he:
- lived in the house as his only residence for 17 years (204 months)
- let the entire property for three years (36 months) before selling it.
The net gain is £450,000 and PPR relief will be available for the period Eric occupied the house as his main home which is 204/240 months. This means that of the gain £382,500 is eligible for relief, leaving a potential gain liable to CGT of £67,500.
Eric also qualifies for nine months of final period exemption which is £16,875. This reduces the potential taxable gain to £50,625 (£67,500 – £16,875).
As Eric was not in shared occupancy with his tenants, lettings relief does not apply for the three years that he let the property. (If the sale had been before 6 April 2020, this gain would have been eligible for letting relief.)
If Eric has not used his annual exempt amount for the year (which for the year 2019/20 is £12,000) he can further reduce the taxable amount to £38,625 (£50,625 – £12,000). If Eric is a higher rate taxpayer he will pay CGT of £10,815 (£38,625 x 28%).
Previously, letting relief would have reduced the chargeable gain to nil.
The higher the net gain and the larger proportion of letting in relation to the ownership period will increase the impact on the tax liability.
Change 2 – The final period of ownership
Generally, the final period of ownership of a person’s home will be tax-free, irrespective of whether it is actually occupied as such during that period. The final period exemption will be reduced from 18 months to nine months (this represents a significant reduction when considering that this was 36 months for a long while prior to 6 April 2014 – when it was halved to the current 18 months).
The rules which give 36 months relief to those with a disability, and those in or moving into care, will not change.
Change 3 – Transfers between married couples
The general rule for capital gains tax (CGT) is that transfers of assets between married couples and civil partners’ takes place at no-gain/no-loss. In addition, the PPR relief rules provide that where one spouse makes a transfer of their only or main residence to the other, the receiving spouse inherits the other spouse’s period of ownership of the dwelling even if that period started before marriage. This rule does not, however, apply to a dwelling which is not their main residence at the time of the transfer. There may be positive or negative effects of a transfer depending on the relevant circumstances.
To make the tax rules consistent, the new rule provide that when a spouse or civil partner transfers an interest in a dwelling to their spouse or civil partner (whether or not the dwelling is their only or main residence at the time), the receiving spouse or civil partner will inherit the transferring spouse or civil partner’s ownership history, including their previous use of the property.
New Payment Deadline and Reporting for Capital Gains Tax (CGT) on Residential Property
In addition to the changes to PPR relief, the government is also introducing a reporting requirement on the sale of all UK residential properties. From 6 April 2020, UK residents disposing of UK residential property will have new capital gains tax (CGT) reporting and payment obligations.
This includes residential investment property and also situations in which the sale of a person’s home is not fully covered by PPR relief.
In such situations, a special return must be completed within 30 days of completion. In addition, if a person is required to make such a return and, as at the filing date for the return, an amount of tax is notionally chargeable, the person is liable to pay that amount on account on the filing date for the return.
Currently, the need to report a capital gain and pay tax on the gain is 31 January following the tax year in which the disposal is made so the new requirements are a significant reduction in timescales.
The introduction of a 30-day reporting and payment window marks a significant change to the administration of CGT. These changes will not apply to gains which are not chargeable to CGT, such as, where the gain is covered by PPR relief and will mainly affect UK residents with second homes or rental properties. A special payment on account return will need to be sent to HMRC at the same time. The payment on account required is the amount of CGT notionally chargeable at the filing date. This is the tax that would be due if, under the normal rules for calculating chargeable gains for a tax year, the tax year ended at the time the disposal is completed.
The general rule will be that within 30 days of the completion of a disposal of UK residential property by an individual, trustee or personal representative, on or after 6 April 2020, a return (‘residential property return’) and a payment on account must be made in respect of the disposal.
Currently, any CGT due has to be paid via the self-assessment by 31 January in the tax year after you sell.
Please note that even with these changes a self-assessment tax return will need to be filed as well.
What to do next?
As can be seen, the above changes may be both complex and financially significant, particularly the changes to lettings relief which are effectively retrospective. However, there is time to plan ahead. If you think that any of the changes may apply to you, please get in touch as soon as possible to discuss possible planning opportunities.
This publication has been prepared by RRL LLP. It is to be treated as a general guide only and is not intended to be a comprehensive statement of the law or represent specific advice. No liability is accepted for the opinions it contains, or for any errors or omissions. All rights reserved.