HMRC is consulting on changes announced at Budget 2018 to lettings relief and the final period exemption, which extend private residence relief (PRR) in capital gains tax (CGT), as well as some technical aspects of the PRR rules
Budget 2018 announced that the final period exemption will be reduced from 18 months to nine months. The special rules allowing 36 months relief for the disabled and those in a care home will not change.
The Budget also announced that lettings relief will be reformed so that it is only available in cases where the owner remains in ‘shared occupancy’ with the tenant. Both changes will come into effect for disposals on or after 6 April 2020.
This consultation seeks views on these two changes, and three technical aspects of the operation of the PRR rules.
Currently, the final period exemption exempts from CGT the final 18 months of ownership of any dwelling that is, or has in the past been, a person’s main residence. The intention of the exemption is to give people a CGT free period in which to sell a dwelling after leaving it.
The consultation points out, however, the longer the exemption period, the more PRR can be accrued on two dwellings (an un-sold old one and a new one) simultaneously. It says from 6 April 2020 the final period exemption will be reduced from 18 months to nine to better target the exemption at owner-occupiers with one main dwelling, rather than those who may have lived in the dwelling as their main residence in the past and have subsequently bought another home they are eligible for PRR on.
The reform to lettings relief announced at Budget 2018 will limit the availability of lettings relief and restrict it to those who share occupation of their house with a tenant for all disposals made on or after 6 April 2020.
The reformed lettings relief will not be available for those periods where an owner has moved out of the property and therefore no longer shares occupation with a tenant or tenants. However, separate relief may be available where the reason for being absent from the property is one of those covered by other reliefs, for example relating to the armed forces.
Sometimes the grounds in which a person’s residence stands contains a separate dwelling. Where this separate dwelling is let out to a third party it does not qualify for lettings relief or PRR under the current law. The proposed changes to lettings relief will not alter this.
The consultation also considers technical aspects of reliefs targeted at Ministry of Defence workers, and transfers between married couples and those in civil partnerships.
The Treasury’s impact assessments suggest the changes will bring in an additional £15m in tax in 2019/20, rising to £150m in 2023/24.
The changes to lettings relief and the final period exemption are estimated to impact around 40,000 individuals per year who sell all or part of a residential property that has at some point during ownership been a main residence. These individuals will face a shorter period of final period exemption and so will have to pay more CGT on their gain when they sell a residential property. Those who sell a residential property that they have let out and were not a shared occupant with their tenants will also lose their entitlement to lettings relief following its reform and will have to pay more CGT on their gain.
The consultation closes on 1 June.
Report by Pat Sweet