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Capital gains tax changes reduced for main residences

The Chancellor may have loosened the purse-strings in his 2018 Budget, but he tightened the tax regime on capital gains and property. The changes will have particular significance for couples who separate and move out of the family home.

Capital gains tax (CGT) relief for gains on the transfer of an individual’s main residence is to be reduced in two circumstances: 1) where a home is let for a period and 2) where an owner moves out of their home before it is sold.

Principle Private Residence Relief

Broadly speaking, Principle Private Residence (PPR) relief is applied by looking at the proportion of time during the period of ownership that the owner occupied the property (or was deemed to occupy it).

Up until 2014, someone could move out their residence up to three years before selling it and still be exempt from CGT. The only requirement is that the property has been occupied by the owner at some point regardless of the length of occupation. That 36-month period of ‘deemed occupation’ was halved to 18 months in April 2014.

From April 2020, this final 18-month exemption period will be halved again to just nine months, apparently prompted by Treasury concerns that sellers are already enjoying considerable benefits from letting their main home.

There will be no changes to the 36-month final period of PPR exemption for those who have a disability or have moved into a care home.

The reduction of the final exemption period is of particular significance to separating couples where one or both of them move out of the main home following separation.

Family lawyers noticed significant impact on separating couples following the previous reduction to 18 months in 2014, with CGT becoming a consideration in a higher number of cases. The further reduction to nine months will impact a far higher proportion of separating couples, as it is common for many to live separately for several months or more before they consult a lawyer or begin any legal proceedings.

Where one partner moves out into another property and the family home is sold months or years later, they may well find their PPR relief is reduced and they have to pay some CGT even if they have not purchased a new home. Leaving the family home is an important decision and family lawyers can advise on the strategic pros and cons of doing so. This tax development is an additional factor to take into account.

Clients who have made an election for principal private residence relief on the basis of the current rules (the 18-month final period exemption) should also review their position, as the proposed reductions may affect previous planning.

Lettings Relief

It was also announced that changes would be made to the relief available for CGT in certain circumstances where property is let. Lettings relief can sometimes apply in addition to PPR where it is let as residential property during a period where the owner is not in occupation.

The maximum gain that can be relieved by lettings relief is £40,000 and it can never exceed the amount of PPR available (if lower than £40,000). From April 2020, lettings relief will only be available if the landlord is also living in the property. This will make lettings relief largely irrelevant, as PPR is also available where an individual occupies the property but shares occupation with a lodger and PPR takes priority over lettings relief.

Draft legislation in relation to the proposed changes has not been published so the detail is not yet available. The proposed changes highlight the importance of taking advice as early as possible so prevent adverse tax consequences.

Published: 21 November 2018

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November 2018

Key Contact

Kirstie Williamson