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Changes to Main Residence Relief and Lettings Relief

Anyone with more than one home who sells a property after 5 April 2020 is likely to have more tax to pay than if it were sold on or before that date. This is because the final period exemption, which treats the final few months of ownership of the home as qualifying for the capital gains principal residence relief irrespective of whether the owner is still using it as their main residence or not, reduces from 18 months to 9 months.  The longer period of 36 months that applies for those going into residential care or the disabled is not being changed.

Where someone has more than one home, it will still be worth making the main residence election within two years of acquiring the second home to select which should be treated as the main residence, but the relief will be much reduced as a result of this change.

At the same time the residential lettings relief, that can help to reduce the taxable gain on a property that used to qualify as a main residence but has subsequently been let, is also being changed.  Whilst the relief currently covers any third party lettings, from 6 April 2020 it will only apply where the owner is in shared occupation with the tenant. As the relief can exempt up to £40,000 of gains, this is a valuable relief that in many cases will be lost, and could significantly increase the amount of tax payable, particularly where a property is owned jointly and both owners each qualified for the £40,000 exemption.

Individuals who may be affected by these changes, may want to calculate the potential impact to enable them to review whether to retain or sell the property.  

By way of example, if a property was purchased in November 2012 for £180,000 and is now worth £220,000, was occupied from November 2012 to October 2016 then let, a sale in March 2020 would not give rise to a taxable gain, a sale in May 2020 would generate a taxable gain of £14,945.

With the changes to the income tax rules already in place for lettings income this may be the last straw for some. Given the length of time that it can sometimes take to sell a property, anyone wishing to take advantage of the current exemptions will need to act fast to ensure that contracts are exchanged on or before 5 April 2020.  If the disposal takes place after that date, any capital gains tax will also need to be paid within 30 days of the date of completion.

By Liz Beadsley, partner in the Tax, Trusts and Estates team

The Chartered Institute of Taxation (CIOT) is urging HMRC to maximise efforts to communicate forthcoming changes to capital gains tax which will introduce new and increase existing tax bills for some home sellers from April 2020.”