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Main Residence Property Sale – New Capital Gains Tax ImplicationsWritten on November 14, 2019 by Kirk Rice LLP

Main Residence Property Sale – New Capital Gains Tax Implications

Changes to the capital gains tax regime are expected to take effect from 6 April 2020 which will bite residential property owners who are selling a property that had been used as their main residence at some point during their ownership. Currently we are waiting for these to be enacted into law, and it is just possible that they may be subject to revision or change.

Under the current proposals, where a property has been lived in and used as your only home throughout the period of ownership, any gain arising on sale is completely exempt from the charge to capital gains tax (CGT) under the Private Residence Relief (PRR) rules. This position remains unchanged.

Where, however, a property was not your main residence for the entire period of ownership, CGT may arise on the sale (or gifting) of the property. As a summary, under current rules, relief from CGT will be available for:

  1. Periods of actual occupation as your main residence.
  2. The last 18 months of ownership: Under current rules, where the property was your main residence at some point during your ownership, this period will be exempt from CGT, even if you are not living in the property at the point of sale. Owners who are registered disabled, or who are moving out to live in a residential care home, benefit from an extended period covering the last 36 months of ownership.
  3. Periods of absence for other reasons as specified by statute: There are several circumstances under which relief will be available. For example, a period of up to 4 years throughout which you were prevented from living in the property because of a condition set by your employer requiring you to live elsewhere.
  4. Periods of residential rental of a former main residence: Where the property has been your main residence at some point during ownership and you have let it on the open market, a useful extension to the Private Residence Relief rules may exempt from CGT the lowest of:
  • the PRR already calculated
  • £40,000
  • the amount of the chargeable gain relating to the period of letting.

This relief is known as Lettings Relief and is available to each owner of the property against their own CGT liability. So, for a husband and wife owning a property together as joint tenants, they are each entitled to the Lettings Relief in their own right. That could, collectively, exempt up to a maximum of £80,000 of the gain arising.

The above reliefs can make a significant difference to the tax bill facing owners of more than one property (or owners of one property, but who live in rented accommodation themselves).

From 6 April 2020, however, the following changes are expected to take effect:

  1. The last 18 months exemption (point 2 above) will be reduced to just 9 months. This will not apply to owners who are registered disabled, or who are moving out to live in a residential care home, where the period of exemption continues to be the last 36 months of ownership.
  2. The Lettings Relief (point 4 above) will be withdrawn unless the owner of the property is in shared occupation with the tenant.

We illustrate the above changes with a basic example:

Richard & Sarah own two residential properties together. They purchased property A in January 2010 for £300,000 and was their only home until March 2012 when they purchased property B. They moved into property B in March 2012 and used it as their only home. Property A was let out from April 2012 and then sold in March 2020 for £580,000.

The gain arising on the sale of property A is approximately:

Assuming both Richard & Sarah are taxed at the highest rate of tax, their CGT bill will be (£73,561 x 28% =) £20,597.

Contrast this with a sale taking place just two months later in May 2020 where the property owners are not in shared occupancy with the tenant:

Assuming the annual exemption and rates of tax remain unchanged, the CGT bill will be (£175,360 x 28% =) £49,101. More than double!

A further change to the CGT regime from 6 April 202 which is now enacted into law (the Finance Act 2019) is that where a capital gain arises on a residential property, a CGT return must be filed with HMRC by the 30th day following completion of the sale or gift, and the tax must be paid by the 30th day following completion.

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If you believe that the above applies to you and are contemplating making a sale, we would encourage you to get in touch as soon as possible. We can help you better understand whether the new capital gains tax rules will impact on your main residence property sale. We can also undertake the computational and compliance work following a sale of any such properties. Please email info@kirkrice.co.uk to arrange a call with one of our tax specialists.

Please note: Answers are given for general guidance only and you should take specific advice before acting on any of the suggestions made.