Apparently, the ‘Doomsday Clock’, which measures the likelihood of a man-made global catastrophe, currently stands at two minutes to midnight. Fortunately, there’s a little more time to plan for a forthcoming restriction to an important tax relief.
Most homeowners will avail themselves of main residence relief (commonly known as ‘principal private residence relief’ or ‘PPR relief’) on several occasions during their lifetimes. This is an expensive capital gains tax relief for the Exchequer; a point that has not been lost on the government, which desperately needs funds and is looking for one or two ‘nice little earners’ from taxpayers, such as by restricting PPR relief in certain ways.
Proposed changes to PPR relief were announced recently. These changes will generally apply to property disposals from 6 April 2020. Perhaps the main attention grabber was a reduction in the ‘final period exemption’ (i.e. the last part of the ownership period where the house was used as the owner’s PPR at some time in their period of ownership) from 18 months to nine months (except in very specific circumstances involving disabled persons and those confined to a care home).
However, a further change is even worse news for some individuals who previously occupied their house as a PPR before letting it out. At present, ‘lettings relief’ of up to £40,000 is available where all or part of the house has at some time in the individual’s ownership period been let as residential accommodation and a chargeable gain arises on disposal of the property.
Unfortunately, lettings relief will be subject to a significant additional restriction for house disposals from 6 April 2020. The relief will only be due, broadly, if part of the house is the owner’s PPR and another part of the house is being let out by the owner as residential accommodation (and not as part of a trade or business). In other words, lettings relief will only be available if the owner shares occupancy of the house with the tenant.
Some house owners may have vacated their ‘old’ PPR to live in a ‘new’ one (e.g. where an individual moved to a different property following marriage or civil partnership). If the old house was subsequently rented out, lettings relief would presently apply to reduce the chargeable gain relating to the gain, possibly to zero. However, if the old property is sold after 5 April 2020, lettings relief would be completely lost.
Example: Tick tock…
Joe (a higher rate taxpayer) is the landlord of a house he originally bought as his PPR on 31 March 1990 for £100,000. He left the property on 1 April 2005 to move into to a better one, and immediately let out his old residence. Joe sold the let property for £300,000.
(1) If the Property is sold on 5 April 2020
Gain before lettings relief: (£300,000 – £100,000) = £200,000 – £110,000* = £90,000
(*Period of occupation + Final period exemption (£200,000 x 198/360) = £110,000)
Lettings relief – lower of:
(a) Gain to which PPR applies (as above) – £90,000
(c) Chargeable by reason of letting
£190,000 x 162/360 = £85,500
Gain after lettings relief (£90,000 – £40,000) = £50,000
(2) If the Property is sold on 6 April 2020
The final period PPR exemption reduces from 18 months to 9 months. Furthermore, Joe would not be entitled to any lettings relief.
Joe’s taxable gain (ignoring the annual capital gains tax exemption) increases from £50,000 to £95,000. His tax liability increases from £14,000 to £26,600.
The end is nigh?
Individuals with residential lettings which they have previously occupied as their PPR and which are standing at a gain should consider whether to ‘bank’ lettings relief. For example, the property could be sold to a third-party, or (say) gifted to adult offspring.
The Finance Bill 2019-20 introducing the restriction in lettings relief is likely to be published shortly after the autumn Budget 2019, which is expected in late October or during November 2019. The Finance Bill will probably become law in Spring 2020. Landlords who are considering a disposal of let property in the circumstances described above will need to decide whether to bite the bullet in advance of the lettings relief changes becoming law, or to wait until they do so (although in the latter case it may be too late to dispose of the property).
Remember – from 6 April 2020 there’ll be lettings relief…but on a radically different basis than we now know it.