Adverse changes to residence relief – last chance to avoid

Feb 18, 2020 | Taxation, Tax Tuesday

house for sale

On 6 April 2020 the planned adverse changes to “private residence relief” and the associated “lettings relief”, on the sale of a house which has been your main residence at some point in time during your ownership, are scheduled to come into effect.

Some taxpayers who are in the process of selling a house might benefit significantly if they can achieve an exchange of contracts prior to that date.

The basic law

Private residence relief (PRR) serves to exempt (from CGT) a gain on sale of your home which has been your “only or main residence” throughout your ownership. (This position will not change.)

Where the house has been your only or main residence during only part of your ownership, PRR serves to exempt that element of overall gain which has accrued during the period(s) when the house was your main residence for tax purposes. (The element of gain treated as exempt is calculated on a time basis, as if the total gain accrued evenly throughout the overall period of ownership.) There may have been periods when the house was not your main residence because, for example, you let it out or you had elected for another property to be treated as your main residence. In these situations a calculation is required to establish how much of the overall gain on disposal is exempt and how much is taxable.

Change to “the last 18 months” rule

The current PRR law allows for the last 18 months of your ownership to be treated as a period of “main residence” for tax purposes, irrespective of your occupation/use of the house. This is helpful to those of you who might be selling a house which is currently not occupied as your home (but which was your home at one point). You may have been able to move up the property ladder and retain your previous home for letting out, for example. This is a classic situation where the “last 18 months” rule is helpful because it shelters the element of gain accruing to those 18 months even though the house was not in use as your home (and even though your current home is accruing PRR at the same time).

From 6 April 2020, this “last 18 months” exemption reduces to the “last 9 months”, meaning that a greater overall share of the gain, in the illustration above, will become taxable. For a house which has been owned a long time, this loss of 9 months exemption might prove to be relatively modest (or it might not!) because, as noted above, the gain is treated as arising evenly across the entire ownership period. For shorter ownership periods, the restriction could bite harder. In any event the taxable position for an exchange of contracts on 6th April will be worse than it is on 5th April this year (all other things being equal, acknowledging that we have a Budget on the 11th March, of course).

This revision to PRR is one change which is unhelpful to the taxpayer in the above-mentioned illustration, but there is another, potentially even more serious change which runs alongside this:

Change to “lettings relief”

Included within the overall PRR rules is an additional relieving provision for what is known as “lettings relief” (LR). This applies where a house, which has been your only or main residence at some point in time, has also, at other point(s) in time, been let to tenant(s), in line with the illustration noted above. LR exempts an additional, capped, amount of gain accruing to the period(s) of letting. Up to a maximum £40,000 of gain (in addition to the amounts exempted by the basic PRR noted above) can be exempted from CGT as a result of the letting.

At the moment “letting” for the purposes of the relief includes the exclusive letting of the house to one or more tenants. From 6 April 2020, however, LR will only apply to periods of letting where the tenant has been in “shared occupation” of the house with you, as owner. The vast majority of cases (ie those involving the exclusive letting of a former home) will therefore no longer benefit from this relief.

This second restriction will add further (and potentially very significantly) to the taxable position for a taxpayer in the scenario outlined by the above illustration, selling after 5th April.

We can, of course, quite quickly calculate how much additional tax is likely to be suffered for a sale taking place after, as opposed to before, the changes in law.

NB. The tax-point for CGT on disposals is the date of “exchange of contracts” which can, of course, precede “completion”; if taxpayers are racing to get a deal done prior to the 6th April, an early exchange with a delayed completion might help to reconcile this challenge.

If you would like to explore your position in relation to the above, please get in touch with your relationship principal here or email to discuss.