Selling your own/former home? Two key changes are on the horizon that may make you want to act quickly


The background

Most people will be aware that there is a relief from capital gains tax (‘CGT’) when selling a property that has been occupied as your main residence.  Principal Private Residence (‘PPR’) relief provides a full exemption from CGT upon sale for periods when the property was occupied by the seller, plus the last 18 months (the ‘final period exemption’).

In addition to the main relief, an additional ‘lettings relief’ applies for periods of non-occupation where the property has been let out, provided that it was, at some point, the taxpayers only or main residence.  The relief provides an exemption for the lesser of the PPR relief, the gain attributable to the let period, and £40,000.


Example

Boris bought a property on 5 April 2000 for £100,000 which he initially let out until 5 April 2005, before moving in himself.  He moves out on 5 October 2018 following a dispute with the neighbours about noise and decides to put the property on the market.  It sells 18 months later on 5 April 2020 for £350,000, realising a gain of £250,000.

Boris will qualify for PPR relief in order to reduce his gain as follows:


Period / 20 Years £
Period of Occupation 13.5 168,750
Last 18 months 1.5 18,750
Total before Lettings Relief 187,500
Lettings relief 40,000
TOTAL 227,500



* Lettings relief is the lower of: (a) PPR Relief – £187,500; (b) The gain over the let period – £250,000 x 5/20 = £50,000; and £40,000.

As Boris is a higher rate taxpayer the relief is worth £63,700 (i.e. £227,500 x 28%).


New rules

From 6 April 2020 two key changes will apply:

  1. The final period exemption will be cut from 18 months to 9 months.
  2. Lettings Relief will only be available where the owner of the property is in shared accommodation with a tenant.

In the above example, if the disposal took place just one day later, on 6 April 2020, the new rules would apply and Boris’s relief would be reduced by £49,375 (i.e. half the final 18 months, plus full withdrawal of the lettings relief).  The cost of this ‘no deal’ scenario is an increase in his CGT liability of £13,825.


Final note

It is important to note that the property sale date for capital gains tax purposes is the date of exchange of unconditional contracts and not the date of completion.  Therefore, the key point is to ensure that exchange happens ahead of 6 April 2020 to avoid the new rules applying.

 

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