I thought you may be interested in an update on some key proposed changes to the taxation of disposals of properties, which have at some stage been lived in as the home.
Relief from capital gains tax is available when somebody sells their only or main residence. It can get rather complex for properties with large gardens, outbuildings or perhaps exclusive business use but there may be total relief from tax, or partial relief in the cases where there have been periods of absence. That said, there are certain periods of absence that still attract an element of relief and this includes the final period of ownership, and certain cases where the property has been let out. Clearly, this is a very valuable tax relief given the increase in property prices over the last 30 – 40 years.
As expected, following announcements in the 2018 Budget, a consultation document was published on 1 April 2019 about main residence relief and primarily relief for the final period and let periods. In addition, the consultation document looks at some other aspects of this often surprisingly complex tax relief. The consultation period ended on 1 June 2019 and we await further details.
The proposed changes are intended to take effect from 6 April 2020. For those affected, the changes could have a negative impact by increasing the tax liability on the disposal of a property that qualifies for main residence relief, or let property relief where a property has at some stage qualified as a main residence.
Current position and proposed key changes
The current position is that once a property has qualified as the only or main residence, either factually or sometimes by way of an election made to HM Revenue & Customs, the final 18 months of ownership are automatically deemed to be treated as qualifying (even if the individual no longer lives in the property during this time). This final period is set to reduce to nine months from 6 April 2020.
Main residence relief is time apportioned so this will have the effect of reducing the relief available to set against a capital gain and therefore potentially increasing the capital gains tax liability. Please note that in certain circumstances, such as when the individual has moved into a care home, the final 36 months will continue to be relieved as has been the case for a number of years, but clearly that only applies in limited cases.
Furthermore, once a property has qualified as a main residence but has partly or entirely been let as residential accommodation there is currently a further relief known as let property relief. This may exempt the capital gain for the let period, subject to certain restrictions. Let property relief is subject to a maximum amount of tax relief of £40,000 to reduce the capital gain per owner – so for a couple, up to £80,000 of the capital gain could be exempted by let property relief.
The proposal in the consultation document is that let property relief will only be available when the tenants are in shared occupation with the owners of the property. This restriction to the relief could have a significant impact on the tax liability of a disposal of a main residence which has at some stage been let as residential accommodation, other than when in shared occupations. If the relief no longer applies, then it could increase the tax on sale by up to £40,000 x 28% per owner – so just over £11,000 (£22,000 for joint owners with maximum let property relief).
When might a capital gain arise other than on a sale?
It is not just the sale of a property that will trigger a capital gains tax liability. It could also occur when a property is for example transferred to the children or grandchildren by way of a gift as part of succession planning for inheritance tax purposes, though not if this is on the death of the owner. Other circumstances where a disposal may occur are on other transfers of properties, such as perhaps as part of a divorce settlement.
Should I take any action?
While these changes are only subject to consultation at this stage, owners do need to be alert to the possible changes. At the moment there is no suggestion of a transition period and so for some there may be a latent tax increase overnight next April. If you are considering a disposal of a property that may qualify for main residence relief and/or let property relief in the next couple of years, you may wish to consider the benefits of making the disposal before 6 April 2020 in case a delay has a negative impact on the tax that you are likely to pay, though there may be other factors to be aware of and tax is only one element of this.
Even if you do not plan on selling the property, there may be an opportunity to crystallise a disposal, perhaps by way of a gift, or the use of a trust, in order to bank the reliefs currently available. Whether or not this would be beneficial will depend on the figures involved.
Ordinarily it is the date of exchange / contract that is relevant for these purposes rather than completion, though in divorce cases and where property is owned by non-UK residents, the date is more complicated.
If you occupy more than one property as a residence, whether or not both are owned, you are able to elect the one that benefits from main residence relief. This can provide the opportunity to double up on the final period exemption or to access main residence relief when otherwise unavailable. There is a time limit for making the election. Failure to make an election means that the question of which residence qualifies for relief will be determined on the facts and this can lead to unintended consequences. Anyone in this situation should review their circumstances carefully.
I would be very happy to provide further information on a case by case basis and if you would like me to quote to provide further advice for your circumstances, including indicative capital gains tax calculations, then please do not hesitate to contact me, or the person that you usually deal with at PKF Francis Clark.