5-Minute Read - Upcoming Changes to Private Residence Relief and Lettings Relief
Welcome to the second of our '5-minute read' series. The aim of these communications is to provide you with a quick update to assist you in keeping on top of upcoming deadlines and/or changes. In our second update we take a look at Private Residence Relief and Lettings Relief.
In the Autumn 2018 budget the Chancellor announced that from April 2020 changes would be made to Principal Private Residence Relief (otherwise known as “PPR”) and Lettings Relief (“LR”), which could have a major impact on the gains arising when you sell a property that is, or has at some stage, been your main residence.
Private Residence Relief:
Briefly, PPR is a tax relief available to reduce, or most usually (subject to conditions*) extinguish any taxable gain liability when you sell your main residence. The amount of PPR available is based upon the proportion of the amount of time you actually lived in the property. As it stands today, the final 18 months (if you are no longer living in the property at the date of sale) will always qualify for the relief, regardless as to how the property was used during that time, providing it has been your main residence at some point over the total period of ownership.
However, this final 18 month period of exemption is being reduced to 9 months as from April 2020. This is with the exception of disabled people, or those in care homes, for whom the final period of exemption is 36 months. Again, this could in some cases lead to capital gains arising where the property is not sold immediately after an individual has moved into a new property.
By way of an example, let's compare the reliefs available if a house was sold pre and post April 2020.
Example: Private Residence Relief
Alex acquired a property on 1 May 2010 and lived in the property until 30 April 2018 when he moves into his new home. Alex's original property is left vacant until it is eventually sold.
Assuming that the profit on the sale before any reliefs become payable was £100,000, then the differing positions if the sale took place in March 2020 and in May 2020 are as follows:
The above example is for illustration purposes only. For further explanation please contact your usual tax advisor or Aaron Phillips.
As you can see by delaying the sale until after April 2020, Alex’s chargeable gain has increased by £8,298 (the difference between £12,500 and £4,202). If we ignore the capital gains annual exemption and assume that Alex is a higher rate taxpayer then he will have an additional capital gains tax liability of £2,323 (being £8,298 x 28%).
LR is a tax relief available to reduce any taxable gains arising on the sale of the property, which has at some stage been your main residence, but has also had periods where it has been let out.
With effect from 6 April 2020, LR will only be available to property owners who have shared occupancy of the home with their tenant. In the majority of cases, this relief will no longer be available, potentially giving rise to a substantial capital gains tax liability.
Example: Lettings Relief
In this case, Alex again buys the property on 1 May 2010 but instead he lives there until 30 April 2015 when he moved out of the property and in with his partner. Alex's property was then let until it was sold. Assuming that the gain before any reliefs was £100,000 the position if the sale took place in March 2020 and in May 2020 is as follows:
The above example is for illustration purposes only. For further explanation please contact your usual advisor or Aaron Phillips.
As you can see by delaying the sale until after April 2020, Alex has gone from having no chargeable gain to having a chargeable gain of £42,500. If we ignore the capital gains annual exemption and assume that Alex is a higher rate taxpayer then he will have a capital gains tax liability of £11,900.
There may be planning opportunities available in respect of these changes and if you would like to discuss these further then please contact a member of the tax team below.
* PPR eligibility criteria:
- the dwelling house has been your only or main residence throughout your period of ownership
- you haven't been absent, other than for an allowed period of absence or because you've been living in job-related accommodation, during your period of ownership
- the garden or grounds including the buildings on them aren't greater than the permitted area
- no part of your home has been used exclusively for business purposes during your period of ownership.