Recent UK Property Tax Changes
HMRC are introducing some very significant changes next year, which might seriously increase the Capital Gains Tax (CGT) that you will pay on the sale of any properties which you still own but might previously have been your main residence. If you have a property, which was once your main residence and either now let it out or have retained it, possibly as a weekend retreat, these changes will affect you. It is important that you understand the changes, as it is likely to result in you having to pay significantly more CGT when you do eventually sell or transfer these properties. There are two changes which are coming into effect from 6 April 2020.
Lettings Relief Reform
Lettings relief was introduced back in 1980. It was designed to ensure that people could let out spare rooms within their homes on a casual basis, without jeopardising the hugely valuable protected status, called Principle Private Residence (PPR) Relief, that came with that property being their main home. Without the relief, home-owners risked losing PPR Relief if they rented out spare rooms, giving rise to a capital gains tax liability when it was eventually sold.
In practice however, the relief extended much further than the original policy intended and has come to benefit most of those who let out whole dwellings rather than just spare rooms, and which at some stage had been their main residence.
The original lettings relief effectively deems that the qualifying gain on the sale of a residence does not give rise to a taxable gain, to the extent that is the lowest of:
- The amount of PPR Relief already calculated; or
- £40,000; or
- The amount of the chargeable gain relating to
- the letting.
Therefore, in a nutshell up to £40,000 of a gain was exempted from tax, if the vendor qualified for the relief. HMRC are now looking to limit the availability of lettings relief by restricting it to those who ‘share occupation’ of their house with a tenant for all disposals made on or after 6 April 2020.
What is Shared Occupation?
Shared occupation is considered to apply where the owner is living in the same dwelling as a tenant and continues to occupy that dwelling as their only or main home throughout the period of the letting. This means that the reformed lettings relief will not be available for those periods where an owner has moved out of the property and no longer shares occupation with the tenant(s). This will have the effect of significantly increasing the tax payable for anyone who has let out their home for a period, whilst not living there.
Reduction of PPR Final Period Exemption
Currently, if a property has ever been your PPR, in most cases, the last 18 months of ownership of that property is deemed to be your PPR and is therefore exempted from tax. From 6 April 2020, this final period of exemption will reduce to 9 months, which will inevitably result in a higher CGT for many properties which are sold after that date.
David purchased a property for £400,000 on 5 April 2005. He is considering selling the house for £700,000 on either 5 April or 6 April 2020. During David’s 15-year (180 months) ownership, he:
• Lived in the house as his only residence for
the first 10 years (120 months)
• Has let the entire property for the remaining 5
years (60 months) before selling it.
The net gain of the sale is £300,000. PPR is available for the period David occupied the property as his main home – so 120 of 180 months. Therefore £200,000 of the gain is eligible for PPR relief, leaving £100,000 potentially liable to CGT.
If the property is sold on 5 April 2020 (or before)
The final 18 months of ownership is deemed to be exempt, so 18 of 180 months. This relief amounts to £30,000, so reduces the CGT from £100,000 to £70,000. David will qualify for £40,000 lettings relief; being the lower of:
- The amount of PPR already calculated – £200,000; or
- £40,000; or
- The amount of the chargeable gain relating to
- the letting period – £70,000.
Assuming David hadn’t yet used his annual capital gain exemption and he is a higher rate tax payer during the year, he will pay £5,040 CGT (£18,000 x 28%).
If the property is sold on 6 April 2020 (or after)
The final 9 months (rather than 18 months) of ownership is deemed to be exempt, so 9 of 180 months. This relief amounts to £15,000, so reduces the CGT from £100,000 to £85,000. As David was not in shared occupancy with his tenants, there is no letting relief available at all, so the net gain chargeable to CGT remains £85,000. Assuming David hadn’t yet used his annual capital gain exemption and he is a higher rate tax payer during the year, he will pay £20,440 CGT (£73,000 x 28%).
The changes to letting relief and the reduction of the PPR final period exemption means David would pay approximately £15,400 more CGT if he sells the property on or after 6 April 2020.
Things to Consider
- Are you letting a property which was once your main residence? If so, it is worth reviewing the likely CGT position to establish any additional tax which might become payable if you sell it after 6 April 2020;
- If you are considering selling or gifting a property within your portfolio, you should consider which properties these changes are likely to effect;
- If you own a property jointly, under the current rules you would each be entitled to the exemptions, so these changes will inevitably have an even greater impact on the overall CGT position;
- Where you are the sole owner of a property, it is worth considering transferring ownership to your spouse, to ensure you both fully utilise your CGT annual allowance.
- It is easy to become an ‘accidental’ higher
- rate tax payer, so it is important to take the
- time to plan future property sales, to
- minimise your exposure to higher rate tax.
Please note that the calculations provided in this article are for illustrative purposes only and cannot be relied upon to work out any tax that might become payable in your own circumstances. Professional advice should always be obtained prior to the completion of any transaction.
If you would like to discuss the changes to UK Property Tax with us in more detail or if you would like to speak with a member of our team, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.
This article featured in issue 13 of our construction and real estate newsletter series. Read the full newsletter here: Real Estate Matters – Issue 13