It will come as little surprise to property owners that the latest Budget has seen them hit with further tax restrictions coming into effect from 06/04/2020 that could see them pay significantly more capital gains tax (CGT) when selling a property which has, at any time, been your main residence (aka principle private residence).
This measure will impact not only those with buy-to-let properties but anyone who owns a property and moves out more than nine months before the property is sold. For example, separating couples where one party moves out before the sale of the family home.
What are the tax reliefs available on selling a former home?
What is changing?
Principal private residence (PPR) relief
Principal private residence (PPR) relief protects taxpayers from being liable to capital gains tax (CGT) during the period a property has been occupied as their main home. PPR relief covers not only periods of actual occupation but also periods of ‘deemed occupation’.
• up to 12 months on initial purchase if refurbishing the property before moving in,
• time spent working away from home (subject to certain restrictions),
• the final 18 months of ownership, regardless of occupation (aimed at protecting those who have a cross-over period when replacing their main home).
For sales after 5 April 2020 the final 18 month ‘deemed occupation’ is reducing to just nine months.
Until 05/04/2014 the final 36 months of ownership counted as ‘deemed occupation.’
This final 36 month exemption will continue to apply for those who have had to move out of their homes and into residential care.
From April 2020, lettings relief will be scrapped for those not occupying the property at the same time as their tenants.
At present, it is available in addition to PPR relief where a property is let out that has, at some point during the period of ownership, been occupied as your home. The maximum relief available is £40,000 per individual. Thus, lettings relief can provide £80,000 tax relief for a couple selling their former residence. This equates to a tax saving of £22,400 for higher rate taxpayers.
Throw in x 2 annual CGT exemptions (£11,700 in the current 18/19 tax year) and gains of just over £100K can be avoided.
At present, I feel that these CGT reliefs dove tail nicely with the ability to reclaim the 3% SDLT surcharge within 3 years of replacing your PPR. For instance, after moving out the clock starts ticking for the 3-year SDLT surcharge reclaim. But the initial 18 months of non- occupation are covered by CGT PPR ‘deemed occupation’ relief whilst lettings relief and annual exemptions should take care of the vast majority of gains (£102,400 maximum per couple) inside the next 18 months. By this time, the ex PPR must be sold in order to reclaim the 3% SDLT surcharge.
How do the current rules work? (up until 5 April 2020)
Sam purchases a flat for £250,000 and occupies it immediately as her main home for five years until she moves into a house with her partner. She chooses to rent out her old flat for the next four and half years, after which time it is put up for sale, selling 6 months later (in June 2018) for £450,000.
Sam owned the PPR for 10 years (120 months).
There was actual occupation for 4.5 years (54 months) and deemed occupation in the final 18 months. Total occupation 72 months qualifying for PPR relief (72/120 = 60%).
Less: acquisition costs/enhancement expenditure (250,000)
Capital gain 200,000
Less: PPR relief: - 60% (120,000)
Less: Lettings relief equal to the lower of: - (40,000)
PPR relief 120,000
Chargeable gain during let period 80,000
Chargeable gain 40,000
Less: annual exemption (11,700)
Taxable gain 28,300
Tax thereon (assuming 28%) £7,924
Although Sam only occupied the property for less than half of her ownership period, less than 15% of the gain is chargeable after PPR, Lettings relief and the annual exemption are utilised.
After changes implemented (from 6 April 2020 onwards)
If a sale took place after 5 April 2020, but all other conditions were the same as outlined above, Sam’s PPR relief would be down to 61 months (50.83%) and she would receive no letting relief.
tax liability would increase by £15,316 (even after taking into account the higher annual exemption).
Less: acquisition costs/enhancement expenditure (250,000)
Less: PPR relief: - (50.83%) (101,667)
Chargeable gain 98.333
Less: annual exemption (using 2019/20 level) (12,000)
Taxable gain 86,333
Tax thereon at 28% £24,173
An increase of £16,249, i.e. over twice her tax liability under the old rules.
What would happen if Sam kept the property for another 10 years?
If Sam decided to keep the property a further 10 years, her entitlement to PPR relief over the total period of ownership would be significantly diluted (& no letting relief). Consequently, CGT would be considerably increased.
It, therefore, follows on that we can probably expect to see a glut of properties coming on to the market from Spring 2019, with some bargains to be had the closer we get to April 2020 as vendors have to balance lower sale proceeds against higher tax liabilities.
As one would assume that many residential landlords will be considering their property portfolios in light of loan interest relief restrictions reaching 75% from 04/2019 (100% from 04/2020), it surely can be no coincidence that these CGT restrictions are occurring at the same time as the income tax restrictions. An attempt to kick start the housing market?
Also, don’t forget that from 06/04/2020, CGT will be payable within 30 days of the sale compared to 31 January following the year of transaction, under the current regime. This can produce a bizarre situation whereby a sale occurring on 06/04/19 would see any tax owing payable by 31/01/2021 but a sale exactly a year later (06/04/2020) would require the tax to be settled by 06/05/2020.
How long do you need to live in a property before it becomes your PPR?
The question of how long one needs to reside in a property for it to qualify as the main home for PPR purposes is one which is frequently raised, but, as is so often the case with tax, the answer is not clear cut. In practice it is the quality of occupation not length of occupation that matters.
A taxpayer must have intended to occupy the property with a degree of permanence. Consequently, where there are only short periods of occupation, the difficulty can be evidencing this permanence to HMRC.
Evidencing intention has proved the defining factor in many recent cases, such as Susan Bradley v HMRC  TC02560. When Mrs Bradley separated from her husband, she moved into their second property and immediately placed the property on the market. This was taken to be evidence that the property was not intended to be occupied as a home with any degree of permanence and PPR relief was denied.
Conversely, if a property is acquired to be lived in long-term but subsequent factors make this impossible, such as a relationship breakdown, then a short-term occupation can be sufficient to provide entitlement to PPR relief.
How do you know which property is your PPR?
A married couple can only have one PPR between them, so if a couple have multiple properties which meet the conditions of a home, an election can be submitted to HMRC indicating which property is to be treated as the main residence for PPR purposes. It does not necessarily have to be the one that is occupied the most. Once an election has been submitted, it is possible to vary the lection at any point in the future.
An election can be made whenever there is a change in circumstances such as the acquisition of a new property, marriage or divorce. Such an election should be made in writing (jointly for spouses) within two years of the change in circumstance.
Sometimes which property should be chosen as the PPR is an obvious choice, for example, a home which will not be sold during lifetime will not benefit from CGT relief. Contrast this this to the MP with a London apartment (family home elsewhere) who is unsuccessful in defending his/her seat in the next election and returns to regular work in the constituency in which the family home is.
In such a case, judicious use of an election could see the London apartment entirely covered by PPR relief (including the final 18 months of deemed occupation under the current regime). This period could then qualify as actual occupation for the family home, probably ensuring that no more than a couple of years PPR relief would be lost on the family home, if ever that is sold.
Otherwise, the suggestion would be that it is the property that is most likely to go up in value quickly that should be nominated as the PPR.
If no elections have been made then which property is an individual’s PPR will be determined on the facts of each case. In some cases which property has been occupied as the main home will be obvious, but if the position is fluid this can help with keeping options for relief open.
The onus is on the taxpayer to provide the evidence of occupation, but with HMRC’s ever increasing ability to access information through its powerful Connect database the number of HMRC enquiries is rising where contradictory information is provided.
HMRC has been known to compare the utility bills of each property and request details of an owner’s diary to enable them to determine the ‘real’ PPR. It is therefore important that taxpayers who may wish to claim PPR relief are able to prove their occupation such as by diarising time spent at each property, ensuring utilities and other household bills are registered in their name, and generally evidencing their occupation.
These changes will no doubt trigger individuals to review the benefits of selling property before the reliefs are withdrawn, especially given the large gains which usually accompany residential property sales.
Consideration should also be given as to how any sale proceeds will be reinvested, especially if the desire is to remain in the UK property market in which case the stamp duty land tax (SDLT) cost will need to be taken into account.
If you have more than one UK property which qualifies as a home, it is worth contacting me to consider the tax implications, even if there is no immediate intention to sell up.