Government plans to change the capital gains tax (CGT) relief regime on private residences by halving the period for main residence exemption have been heavily criticised for displaying inconsistencies with the rules on stamp duty land tax (SDLT), and for a lack of communication to those affected
Finance Bill 2019-20 confirmed a tightening of private residence relief (PRR), reducing the final period exemption from 18 months to nine months. The existing the 36 months period available to disabled persons or those in a care home is retained. The legislation also reforms lettings relief so that it only applies in those cases where the owner of the property shares occupancy with a tenant.
Nimesh Shah, a partner at Blick Rothenberg, said: ‘Strangely, you still have 36 months to sell your former home for the purposes of reclaiming the additional 3% SDLT. It seems bizarre that there is one policy for CGT and something different for SDLT – why not align both to make the overall tax regime simpler?’
Brian Slater, chair of CIOT’s property taxes sub-committee, said HMRC needed to do much more to publicise the changes effectively.
‘Many home owners are still unaware that the final period exemption was reduced from 36 months to 18 months in 2014. A further reduction to just nine months is likely to bring more property disposals within the scope of CGT. Whilst the average time to sell a property is around four and a half months, there will be many exceptions due to regional variations, separation and divorce, and other complexities,’ he said.
Another aspect of the relief which is also changing from 6 April 2020 is lettings relief, which can be worth up to £11,200 in CGT, limiting it to narrowly defined circumstances in which the owner shares occupation of their house with a tenant.
Shah said: ‘The original consultation document noted that lettings relief was introduced in the 1980s to encourage people to rent out spare rooms in their homes, without it affecting main residence relief.
It has taken HMRC and the government close to 40 years to conclude that the rules, as originally designed, did not achieve that purpose and are now acting to make the change.
‘I am somewhat sceptical that this is the real reason for the change, and the rule change makes it clear that the government want to restrict its availability. In my view, it would have been far simpler to abolish the relief completely.’
CIOT is calling for HMRC to up its efforts to communicate details of this change as well.
Slater said: ‘ The practical effect of these changes will be that very few sellers will qualify for lettings relief if they sell their home after 6 April 2020. Further, any “accrued” letting relief will be lost, as no apportionment can be made between gains attributable to pre and post 6 April 2020 disposals. Again, this change brings more disposals within the scope of CGT.
‘The government needs to consider its communications plan around these changes carefully. For example, simply updating guidance on GOV.UK is inadequate, and direct communications to estate agents, conveyancers, solicitors etc will be important to help ensure sellers are aware of the new rules. This is vital given the separate new requirement from April 2020 to report the disposal and pay any CGT within 30 days of completion.’
Government estimates suggest the two changes will generate an additional £470m over the next four years. However, the proposal to introduce an additional 1% SDLT for foreign purchasers, originally a policy put forward by Theresa May, has been dropped.
CIOT welcomed the decision, having said in its consultation response the government should refrain from making further changes before the impact of other recent changes has been properly assessed and the evidence base for the surcharge evaluated fully.
However, Blick Rothenberg partner Sean Randall described the omission of the planned surcharge was ‘double-edged’, given the government has indicated it is postponing rather than abandoning the concept.
‘On the one hand it gives respite to foreign buyers and to house-builders who rely so much on foreign buyers for off-plan purchases; but on the other hand the unequivocal confirmation that it will be introduced will cause concern.
‘ Cynics might say that the government is stalling until the UK exits the EU for fear of passing legislation that contravenes EU law. But the reality is probably merely that more time is needed to draft the legislation. The consultation only ended two months ago. The prime central London housing market can breathe a sigh of relief, for now.’
Finance Bill 2019-20 Changes to ancillary reliefs in Capital Gains Tax Private Residence Relief
By Pat Sweet | 16-07-2019