As part of our comprehensive tax planning services, we advise you on capital gains tax, and the following updates above will be of interest to you if you own properties: Capital gains tax may occur on gains you make when selling a property, unless that property qualifies as your PPR for the entire duration of ownership, in which case, PPR relief will apply and the gain will be exempt from tax. If the property qualifies as your PPR for only part of the duration of ownership, a portion of the relief will be due, which will reduce the capital gains tax.
It is worth mentioning that PPR relief is protected in some situations where a property owner’s circumstances change, and those changes affect their eligibility to claim relief. This protection is given in the form of ‘ancillary relief’. For example, if someone is not able to live in their main residence due to the work they do, any gains they make for up to three years can be protected.
Other periods of absence are also covered by two reliefs: final period of ownership relief and lettings relief: Final period of ownership relief originally provided PPR exemption for the final 36 months of ownership of a PPR, but following a reduction in this relief, it now provides PPR exemption for the final 18 months of ownership, whether you continue to live at the property or not. This means it will apply for that period if the property is empty, or even if it is being rented out, as long as it has been your PPR for some time during your ownership.
Lettings exemption applies in cases where a property has been your PPR at some time during your ownership and has also been rented out. There is a maximum of a £40,000reduction in the capital gain per person, restricted to the amount of PPR exemption claimed. Both these reliefs are due to be restricted for property sales after the 5th of April 2020. These restrictions were first announced in the 2018 Budget.
How are the tax reliefs changing?
Final period of ownership relief reduces from 18 months to nine months The final period relief is currently 18 months, meaning that a property owner is able to accrue tax relief on multiple properties intentionally, which goes against the original objective of PPR relief, for owners of their main property. The government declared that by cutting the time to 9 months, the legislation will better reflect the needs of people who want to move home but are finding it hard to sell their property.
The 9-month restriction period will come into action from the 6th of April 2020. It is important to know that the property sale date for capital gains tax purposes is the date of exchange of unconditional contracts, not the date of completion. Any taxpayers who are disabled or who are moving into social care won’t be affected, and their entitlement to PPR will be 36 months as before. The annual CGT allowance of £12,000 per taxpayer can also be used to reduce gains on a property sale. However, this annual CGT allowance cannot be carried forward if unused, and it cannot be backdated. If unused during the relevant tax year, the allowance will be forfeited.
How the 9-month period works
You bought a home on the 1st of April 2003 for £100,000 and lived in it as your main home until 31 March 2013, when you moved to another main home. You didn’t rent outout the first property and it is now sold on the 30th of April 2020 for £300,000, resulting in a gain of £200,000. You are entitled to PRR relief for the period from 1 April 2003 to 31 March 2013 (120months), when you used the home as your main residence. You did not live in the property for the period from 1st of April 2013 to 30th of April 2020 (97 months). Under the new rules, the final period relief will be available for the nine-month period from 1 August 2019 to 30 April 2020 and the balance of the gain will be chargeable.
This means that of the 217-month period of ownership, 129 months (120 when you lived in the property as your main residence plus the final 9 months) will qualify for PPR relief. This reduces the chargeable gain by £118,894 to £81,106. Once you have claimed your annual CGT exemption of £12,000 for the year 2020/21, CGT will be due on a chargeable gain of £69,106. If you are a higher rate taxpayer, you will pay CGT at the rate of 28% applying to residential property, and will have a CGT liability of £19,349.68.
Lettings relief is restricted unless the owner is in ‘shared occupancy’ with the tenant. At the moment, PPR lettings relief provides up to £40,000 of relief (or £80,000 for a couple) to those who sell a property which has been their PPR and has also been rented out to tenants. The relief applies whether a single room is rented, or the whole property. From the 6th of April 2020, lettings relief will be restricted and will only be available to those who are in shared occupancy with a tenant, such as a couple renting out rooms to lodgers but also living in the property. However, in this example the couple will be able to claim PPR relief on a large proportion of the gain on disposal of the property because they live at the property. In that case, the chargeable gain will be restricted.
How the new lettings relief rules will work
You purchased a house for £200,000 in 2000, selling it for £350,000 in 2020. During that time, you lived in the house as your only residence, but let out two spare rooms amounting to 25% of the property, to tenants who had exclusive use of their rooms. PRR relief will not wholly relieve any CGT arising on the sale of the property. Lettings relief will apply as follows: You make a net gain of £150,000 when you sell the property and are entitled to claim PRR relief on 75% of the property which covers £112,500 of the gain. That part of the gain attributable to the letting and not qualifying for PRR is £37,500. Lettings relief is due on the lesser of the amount of PRR relief (£112,500) or £40,000, or the gain attributable to the letting (£37,500). This means the amount of lettings relief due is £37,500 and the whole gain is exempt from CGT.
New rules for married couples and civil partners
The current rules dictate that where one spouse makes a transfer of their only or main residence to the other, the acquiring spouse’s period of ownership of the residence is considered equal to that of the transferring spouse, even if the period started before their marriage, and they are therefore eligible for the historic PPR relief in full. However, if the property is transferred at a time when it is not the couple’s PPR, the acquiring spouse will not inherit the disposing spouse’s PPR relief. The government is considering whether these outcomes should be reformed and made fairer, so that the acquiring spouse should always inherit the transferring spouse’s period of ownership and the total use to which the property was put during that time.
If you would like to find out more about property capital gains tax regulations, please get in touch with the Kelvin Partnership.