If you’re an owner-occupier, Private Residents Relief (PRR) protects you from Capital Gains Tax (CGT) liability when you sell your home. Not so if you sell a second home or a property you’ve been letting out – even if it was at one time your main residence. In such circumstances, you’ll have to report the transaction to HMRC and likely pay CGT on at least some of the profit you make.
Included within PRR, are ancillary reliefs which have for many years enabled non-owner-occupiers to reduce their CGT liability. But benefitting second-home owners and buy to let landlords in this way is not in line with the government’s ambition to boost private home ownership.
To help rectify this situation, the government is introducing two changes to PRR next month.
From 6th April 2020, if you sell a property which at some point during your ownership was your home, these changes will have a significant impact on the amount of CGT you will be liable to pay.
Note: These new rules are in addition to the change we discussed last month, requiring anyone selling a residential property after 5th April 2020 to report and pay any CGT due within 30 days. Read more…
Change 1: Final period exemption relief to be halved
If you complete the sale of a residential property that was at some point your home before the end of this current tax year on 5th April 2020, the final 18 months of ownership will be counted as you living there for CGT purposes – even if you didn’t live in the property as the owner-occupier during that final period
From 6th April however, final period exemption relief is being cut in half, so you’ll only be able to claim relief for the last 9 months of your ownership. As a result, depending on when a sale completes, some landlords disposing of properties and owners selling second homes will find themselves landed with a CGT bill they wouldn’t have received under the old rules.
The special rules that give those in or moving into care homes, and people with a disability, 36 months of exemption will not change.
Change 2: Restrictions to Lettings Relief
It’s not uncommon for someone to become an ‘accidental’ landlord – perhaps when two property-owning individuals become a couple and decide to move into one house and to let out the other.
If you’re in this situation and you complete the sale of the property you’re letting out on or before 5th April 2020, you will be entitled to claim Lettings Relief up to a maximum of £40k (£80k per couple) to reduce any CGT due on the sale.
But as of 6th April 2020, this generous relief will no longer be available – unless you can demonstrate that you were still living in the house yourself while you were letting it out to your tenant.
This change will not affect owner-occupiers or landlords who have never lived in the property they are renting out.
What’s Your Best Move? We Can Help You to Decide!
From the start of the new tax year, the 30-day rule on reporting and paying CGT together with the changes to ancillary relief as applied to PRR will have implications for anyone selling a second home or a rented property they once lived in.
The deadline is almost on us. If you’re in the process of a sale and the other parties are willing and able to accommodate you, it will be financially beneficial to complete before 6th April.
If, however, you’re thinking of making a sale sometime in the future and have concerns about how these changes will affect you, we can advise you on the best course of action and help you plan your sale so that your tax liability is minimised.