Malcolm Finney takes a look at the possible future changes to private residence relief for capital gains tax purposes.
HMRC issued their promised consultation document (CD) on private residence relief for capital gains tax (CGT) purposes entitled ‘Capital Gains Tax: Private Residence Relief: changes to the ancillary reliefs’ on 1 April 2019. The consultation period closed on 1 June 2019.
It is intended that any changes introduced will be effective from 6 April 2020.
Trouble ahead?
Budget 2018 announced two major changes to the current provisions relating to private residence relief:
(1) The final period exemption will be reduced from its current 18 months (introduced in April 2014) to nine months, although the special rules allowing 36 months relief for the disabled and those in a care home will not change.
(2) Lettings relief is to be reformed so that it is only available in cases where the owner remains in ‘shared occupancy’ with the tenant.
Other related proposed changes include extending job-related accommodation relief; legislating for ESCs D21 and D49; and modifying the rules on inter-spouse transfers.
This article will concentrate on examining the final period exemption, lettings relief, and inter-spouse transfers.
Final period of exemption
The current exemption in relation to gains attributable to the final 18-month period of ownership of a sole/main residence disposal is designed to take into account that a sale of the residence may not take place until after the owner-occupier has ceased to reside in the property.
In a fast-moving property market, the proposed reduction from 18 to nine months should not prove too disadvantageous for many; however, in a somewhat slow moving or stale property market, nine months seems too short, increasing the likelihood of a CGT charge on any capital gain made.
One of the provisions (TCGA 1992, s 225B) is intended to provide a divorcing spouse who leaves the former matrimonial home with relief from a CGT charge, which is attributable to a capital gain on a sale of the former home related to the period of ownership after having left the home.
Unfortunately, in many cases, no such relief applies due to the departing spouse having purchased a replacement main residence prior to the sale of the former home. A reduction from 18 to nine months in such cases could only exacerbate any potential CGT charge.
Lettings relief
Lettings relief is to be denied unless there is so-called ‘shared occupancy’ (i.e. occupation in the property by both owner and tenant at the same time). This means lettings relief would be denied where, for example, the owner cannot sell the property having bought another (having moved into the latter) who decides to let out the former property pending a change in market conditions.
It is assumed that any such changes are not designed to be retrospective, although this seems a little unclear (see paragraph 4.7 of the CD).
Inter-spouse transfers
The proposal is that the receiving spouse should always inherit the transferring spouse’s period of ownership and the use to which the property was put during the time when owned by the transferring spouse.
Currently, this occurs only where at the time of transfer the property is the sole/main residence of both spouses, which can lead to anomalies (see examples 6 and 7 of the CD). It may be that in some cases, compared to the current provisions, there may be a loss of some private residence relief (see example 6 of the CD).
Practical tip
Examine whether any intended sales should be brought forward to before 6 April 2020.
