When you sell or dispose of your own home including garden or grounds within the permitted area (in the UK or Abroad) you won’t have to pay any Capital Gains Tax (CGT) if the property has been your only or main residence throughout the period of ownership.
To protect gains made by individual in certain circumstances, there are several ancillary reliefs that extend the benefit of PPR beyond those who are occupying their main residence.
The government is making a number of changes to the PPR relief from April 2020. These changes mainly affect taxpayers who have occupied a residential property as their main residence and have also let the property out at some point during the period of ownership.
Change 1 – Final period exemption being reduced from 18 months to 9 months
Currently, if a property has been occupied at any time as an individual’s main PPR, the last 18 months of ownership is disregarded for CGT purpose.
From 6 April 2020, this final exempt period will be reduced from 18 months to 9 months. There will be no change to the 36 months exempt period available for those with disability or moving into care homes.
Effectively, this change has already started as the 9-month rule will have retroactive effect for any sale that takes place on or after 6 April 2020. If a homeowner starts letting their house out now, leaves it empty or moves, they can be caught out by the new rules if they do not sell the house until next April. This means the homeowner could be presented with an unexpected CGT bill.
Change 2 – Lettings relief is restricted unless the owner remain in ‘shared occupancy’ with the tenant.
Where the PPR relief is available there is an additional relief which can also reduce the extent to which a capital gain on a property is chargeable if the residence has been fully or partially let. This is equivalent to the lower of £40,000 or the amount of gain exempt by reason of the PPR claim or gain attributable to the letting available to per owner or joint owner of the property. The initial aim of this relief was to enable people to rent out spare rooms easily, but has since been used for relief in cases where a whole property is let out provided the property was at some point the owner’s main residence.
From 6 April 2020, letting relief will be restricted and will only be available to those who are in shared occupancy with a tenant. Effectively, this means letting 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. This will result in letting relief being available in exceptionally limited circumstances.
Change 3 – Married couples and civil partners
Generally, there is no gain/no loss in transfer of assets between married couples and civil partners making it exempt transfer for CGT.
The current rule provides that transfers of their only or main residence between married couples and civil partners, the receiving spouse’s will inherit the transferring spouse’s period of ownership and the use to which the property was put during that time, even if that time period started before marriage. To make the tax rules consistent, the changes provide that when a spouse or civil partner transfer an interest in their main residence to their spouse or civil partner the property’s history (such as purchase cost, type of occupation, use etc.) is transferred with the dwelling to the receiving spouse/civil partner. This applies to any residence, whether main or not. This could reduce the main residence relief where a let property is transferred to a spouse and then becomes the couple’s main home.
Change 4 – Changes on CGT reporting and payment of tax due
In addition to changes to PPR relief, the government is also introducing a reporting requirement and payment of CGT tax due within 30 days of the completion of the disposal of UK residential properties, including residential investment property and also situation in which property is not fully covered by PPR relief. These CGT returns are in addition to the preparation and submission of your normal yearly self-assessment (SA) tax return. The annual SA tax return will be amended to include a reconciliation page, where an individual will have to state all the CGT disposals made during the tax year and set off payment on account against the total tax payable for the fiscal year in question.