Principal private residence relief - changes ahead for homeowners as draft legislation is published

Last week, the government published draft legislation setting out various changes to principal private residence (PPR) relief, the tax relief which protects an individual selling their home from capital gains tax on any gain.

Originally announced by the Chancellor in the 2018 Budget, a consultation on the proposals closed on 1 June 2019 and the following changes are now due to take effect from 6 April 2020:

  1. Reduction of final period exemption

    Under current rules, provided that a property has at some point been the owner's only or main home, the last 18 months of ownership always qualifies for PPR relief, whether or not the owner remains living in the property during this period (in order to allow for practicalities of selling and moving). 

    From 6 April 2020, this 18 month exemption will be reduced to nine months, meaning that an additional nine months of gain may (if the owner is no longer in occupation of the property during this period) be subject to capital gains tax. (It should, however, be noted that existing rules allowing a 36 month final period exemption for disposals by those who are disabled or in a care home remain unchanged.)

    The majority of respondents to the government's consultation felt that a nine-month final period exemption was too short, particularly in light of the current housing market. However, the government considered that "for the majority of individuals, a 9-month final period exemption strikes the right balance between being long enough to provide relief whilst they go through the process of selling their home, but not so long that they are able to accrue large amounts of relief on two properties simultaneously, or on homes that are no longer used as their main residence".
  2. Lettings relief

    A relief known as lettings relief is currently available where a taxpayer's property is let, as long as at some point during the ownership the property qualified for PPR relief. The portion of the ownership during which it was the owner's main residence will attract PPR relief (plus 18 months or, from April 2020, nine months) and the remaining period can benefit from lettings relief (which is capped at £40,000). 

    From 6 April 2020, lettings relief will be reformed so that it only applies where the owner is in shared occupation with the tenant. The change to lettings relief means that, where the owner is not living in the property, no relief will be available beyond the period for which the property qualifies for PPR. 

    Most respondents to the consultation also objected to the changes to lettings relief and some felt that any new rules ought to apply only in respect of lettings made after April 2020. However, the government has rejected this suggestion.
  3. Other changes

    Some other technical changes to the PPR relief rules have also been announced:
  • Extra-statutory concessions

    In certain circumstances, HMRC grants concessions to taxpayers that they would not be entitled to under the strict letter of the law. There are currently two "extra-statutory concessions" relating to PPR relief: ESC D21 (which allows an extension of the usual two-year time limit for nominating a main residence for PPR relief purposes in cases where an individual has more than one residence but only one has any real capital value) and ESC D49 (which applies where an individual is initially unable to occupy their new home because they are either completing the sale of their old home or constructing/renovating their new home). 

    From 6 April 2020, these extra-statutory concessions will be incorporated into the capital gains tax legislation. Although there has been no suggestion from the government that this is intended to change the operation of the existing concessions, it is arguable that the draft legislation is more generous than the existing wording of ESC D49 since it confirms that the period of permitted non-occupation (due to completing the disposal of the individual’s old home or the construction/renovation of their new home) is 24 months from the date of acquisition in all cases, ESC D49 currently allows only 12 months with an extension to 24 months in certain circumstances. However, since individuals are treated as owning a property for capital gains tax purposes from the date of exchange of contracts, some of this 24 month period may well be used up before the individual completes on the purchase. 

    It should also be noted that there are certain conditions which must be complied with before either concession can apply so should those that wish to take advantage of either concession, should take care to check whether they fall within the scope of the legislation.
  • Transfers between spouses

    Transfers of assets (including transfers of a home) between spouses take place on a "no-gain/no-loss" basis. However, under current rules, in certain circumstances, the receiving spouse does not “inherit” the transferring spouse's previous use of the property. In some cases, this can mean that, on a future disposal, PPR relief is available in respect of the whole gain even where the property was previously let out and in other cases, PPR relief can be denied on a property that may have been used as a main residence in the past.

    In order to ensure fairer outcomes, changes are to be made so that, from April 2020, where an individual transfers all or part of their interest in any residence to their spouse, the receiving spouse will always inherit the transferring spouse’s ownership history. 

    If advice should be taken thinking about transferring a residence to a spouse, check whether it will be better to make the transfer before or after the new rules come into force.
  • Extension of job-related accommodation relief

    Currently, people who live in employer provided accommodation, including military personnel living in accommodation provided by the Ministry of Defence (MOD), qualify for relief which ensures that any gains arising on the property they would be occupying as their main residence (but cannot as they must live in work related accommodation) are protected from capital gains tax. 

    This relief is to be extended to military personnel who do not live in MOD accommodation but instead rent in the private sector as part of the MOD's "Future Accommodation Model". (Note that, unlike the changes mentioned above, this will not come into force on 6 April 2020, but will instead apply from the date on which the income tax exemption for armed forces’ job-related accommodation is brought into force.) Some respondents to the government’s consultation suggested that a similar approach be applied to other occupations; however, the government did not agree so this change will have limited application.

These changes could affect those that are planning on disposing of a home which they no longer occupy or which has been let at some point during their period of ownership. In these circumstances, it would be worth considering a sale before April 2020 to take advantage of the 18 month final period exemption and the current lettings relief rules.

If you would like further information or advice on the forthcoming changes, please contact us.