Cut to tax relief on homes
Sunday, December 2, 2018
Two announcements in the Budget on 29 October 2018 will affect the capital gains tax (CGT) relief available when a taxpayer disposes of his or her main home. Although both changes are due to take effect for disposals made on and after 6 April 2020, they will have a bearing on decisions made well before that date.
The CGT exemption on a taxpayer’s only or main home (aka principle private residence relief: PPR) is so engrained in the British psyche that people think it’s an absolute right to enjoy a tax-free gain when they move. But this exemption is not automatic, the taxpayer must generally occupy the home for the entire period of ownership for the CGT exemption to apply in full.
There are a number of exceptions from this “must be in occupation” rule, which permits certain periods to be treated as periods of occupation, when the owner is in fact living elsewhere.
Last period of ownership
The most useful exception is for the final period of ownership, which applies when the taxpayer has moved out of the home before the contracts for sale are exchanged. Note the ownership period for CGT runs between the dates contacts for purchase and sale are exchanged, not the dates on which those contracts are completed, which is usual the day on which the consideration is paid and the new owners take possession of the property.
The last 36 months of ownership were deemed to be a period of occupation for disposals made before 6 April 2014, when that exempt period was cut to 18 months. However, the 36-month period of deemed occupation was retained where the owner (or their spouse) had moved into a care-home or who is disabled.
The government is proposing to cut the final period of deemed occupation to just nine months for disposals made on and after 6 April 2020. However, the 36-month exemption period will be retained for disabled owners and for those who have moved into residential care.
Initial period of ownership
The deemed period of occupation for the last period of ownership doesn’t have an equivalent mirror in the legislation for the initial period of ownership. Where a taxpayer doesn’t move into their new home for months or years after contracts have been exchanged, he can be exposed to a gain that accrues for that early period of ownership.
HMRC always assume that a gain accrues evenly across the period of ownership, even if it is clear that for some periods the property is worth very little.
There is an extra statutory concession (D49) which allows up to 24 months to be treated as a period of occupation if circumstances exist that prevent the taxpayer from occupying the property. Those circumstances are:
- when the house is under construction on land already acquired;
- alterations or redecorations of the property are being carried out; or
- the taxpayer continues to live in his previous residence while arrangements are made to sell that property.
HMRC will not allow this initial period of deemed occupation to last more than 24 months. However, it was recently decided at the First-Tier Tax Tribunal (in case: Mr & Mrs McHugh:TC06605), that where the delay in taking up occupation is longer than 24 months, the concession D49 can allow up to 24 months of that unoccupied period to be treated as a period of occupation.
Where the property is purchased off-plan (ie before it is fully constructed), you may assume that the concession D49 could cover the period before the property is habitable and the new owner can move it. However, at the Upper Tribunal (HMRC v Desmond Higgins) the judge decided that concession D49 could not be used to cover a delay between the exchange of contracts and the completion of those contracts. Thus, where a taxpayer can’t move into to a property because he has not completed the contract for purchase, he can be exposed to a gain on that initial period of ownership between the dates of exchange and completion.
Where the home has been let at any time, the gain arising for the period of letting can be exempt from CGT, if and only if the property was occupied as the taxpayer’s only or main home at some point while he owned it.
This lettings relief can cover gains of up to £40,000 per owner, but the relief is also capped at the amount of CGT relief due for the period of actual occupation of the property by the owner.
Where the taxpayer has retained his former home and has let it after he moved out, lettings relief can provide a useful additional CGT exemption, which may wipe out gains accruing during the period the property was let.
The government is proposing to restrict lettings relief to periods in which the owner is in shared-occupancy with the tenant, with effect for disposals made on and after 6 April 2020. This appears to mean that owner must be living in the property for most of, or the whole of the time that part of the property is exclusively let.
For example, an annex may be let out such that the property owners are excluded from that part of the property. Where a room is let to a lodger and that lodger does not have exclusive rights to part of the property, the CGT relief for the whole property is not affected by that letting.
Where taxpayers are planning to move, and then let the former home for a period that stretches beyond 6 April 2020, they need to be advised of the proposed changes in the law. The expected CGT relief will not apply for more than nine months after they move out of the home.