The Government has proposed changes to the principle private residence relief (PPR) in a move that is expected to raise £470m of extra tax over a five year period. Depending on individual circumstances the changes could affect any homeowner.
It is likely to affect those selling their homes in West Yorkshire where, according to ‘Time to Sell Analysis’ statistics from Home.co.uk, it currently takes 117 days on average to sell a home. Flat owners and those with larger or more expensive properties appear likely to be amongst those worst hit by the new rules. In the last 90 days, flats took an average of 163 days from coming onto the market to reaching a sold status and properties worth over £500k took 189 days.
A consultation document was released on 1 April with the government’s proposed changes to the PPR. This follows the announcement in the 2018 budget.
Currently, a qualifying disposal of a residential property is not subject to capital gains tax (CGT) for the period in which it has been a person’s main residence. In calculating this relief, should the property have qualified for PPR at any time, then the final 18 months of ownership will also be included as a qualifying period.
For example, Mrs Smith owned a home for ten years. It was occupied as her family home for the first three years and six months. She left and let it out before selling it and realised a gain of £500,000. The total qualifying PPR period is five years (accounting for the first three years and six months and final 18 months final exemption period) and therefore 50 per cent of the gain (i.e. £250,000) would be exempt from CGT.
From 6 April 2020 the final period exemption will be reduced from 18 months to nine months in order to better target the owner occupier rather than those who manage to qualify for PPR on more than one home. In the above example only £215,000 would be exempt, increasing the CGT liability by £9,800.
This reduction will not apply to those with disability or moving into care, who will continue to qualify for a 36-month final period exemption.
Chris Etherington, a tax partner at RSM in Leeds, said: ‘These changes could affect anybody who owns their own home, as nine months is not a long period to dispose of a home especially in difficult economic times. Statistics indicate that some properties in West Yorkshire currently take around six months to sell and the new rules will put additional pressure on homeowners who have moved and are finding it difficult to sell their former home.
“Those whose sales fall over through no fault of their own could be hardest hit and given the uncertainty in the economy, the halving in the final period exemption is likely to be unpopular with homeowners. This is a timely reminder to homeowners to review their position to ensure that they are not exposed to an extra tax liability they have not budgeted for.”
Currently letting relief is available where part of the home is let. It is limited to £40,000.
From 6 April 2020 letting relief will be restricted to those who share occupation of their home with a tenant. This will prevent the relief being claimed on let properties where the homeowner has moved out.
A transfer of a home to a spouse will currently restart the PPR ownership clock. The government is considering whether the ownership history should be inherited by the spouse.