All UK taxpayers have an annual exempt amount below which there is no liability to Capital Gains Tax (‘CGT’). Any capital gain arising on the disposal of a residential property is currently subject to CGT at the rate of either 28% (higher rate taxpayers) or 18% (basic rate taxpayers). However, any gain made on disposal of an individual’s main residence which they have occupied as their main home throughout the entire period of ownership is wholly exempt from CGT through the use of Private Residence Relief (‘PRR’). Reliefs are also currently available to those who have not occupied the property for the entire period of ownership.
On 29 October 2018 the Rt Hon Phillip Hammond presented his 2018 Budget to Parliament and proposed changes to PRR, aiming to ensure it is more focused towards owner-occupiers. It is proposed that the rules on two of the main ancillary reliefs currently available, being lettings relief and the final period exemption, will change in April 2020 as follows:
This relief is available to those individuals who let out a property that is, or has historically been, their main residence. Relief of up £40,000 (£80,000 for couples) against the capital gain is currently available on the property, even if the owners have not occupied it for a long time.
However, this relief is to all extents and purposes disappearing, as from April 2020 it will only be available to those owners who occupy the property in shared occupancy with a tenant. Thus, homeowners who move and let out their former home will be affected and may now wish to consider selling the property sooner rather than later to avoid an increased CGT bill.
The changes to this relief will not affect landlords who have never lived in the property they are renting out.
Final period exemption
This relief means that at present, the final 18 months of ownership is covered by PRR, even if the property is not the individual’s only or main residence during that period. In other words, an individual currently has 18 months from the date of moving out before any gain begins to accrue.
From April 2020 this relief will be reduced to only 9 months, a period which HM Treasury considers to be twice the length of an average property transaction. For disabled owners or those who live in residential care, the existing 36 month exemption period will remain in place.
Hold over relief
Hold-over relief remains available where transfer of a property is directed under certain Court orders. However, where the parties are transferring property under an agreement, the opportunity to hold-over CGT until the property is disposed of by the recipient spouse is not available unless the parties can realistically justify the transfer as being treated as a gift.
HMRC’s website provides an example of how the system works at the moment. Based on their example, there is a material difference in the amount of CGT which would be payable under the current regime and that payable after April 2020, as follows:
Base facts: A gain of £120,000 is made upon sale of a home which an individual has owned for 12 years, and in which he resided for 6 years and let out in full for 6 years:
PRR: 6 years + the last 18 months of ownership, even though the owner was not living in it = 7.5 years.
PPR: (7.5 years / 12 years) × £120,000 = £75,000 upon which no CGT is payable
Chargeable gain: (£120,000 – £75,000) = £45,000 upon which CGT is payable
Lettings relief: lower of the PRR sum, £40,000 or the overall chargeable gain from letting the property. In this case the lowest figure is £40,000.
Chargeable gain after lettings relief: (£45,000 – £40,000) = £5,000
CGT payable at, say, 28%: £5,000 × 28% = £1,400
Situation from April 2020
PRR: 6 years + the last 9 months of ownership, even though the owner was not living in the property = 6.75 years.
PPR: (6.75 years / 12 years) × £120,000 = £67,500 upon which no CGT is payable
Chargeable gain: (£120,000 – £67,500) = £52,500 upon which CGT is payable
Lettings relief: N/A.
Chargeable gain, no lettings relief: £52,500
CGT payable at, say, 28%: £52,500 × 28% = £14,700
Therefore, once the April 2020 changes are introduced, the higher rate tax liability increases by £13,300 from £1,400 to £14,700. At the lower rate of 18%, the CGT liability increases by £8,550 from £900 to £9,450
Whether realistic or not, HM Treasury believes that delaying implementation of the above changes until April 2020 will give people sufficient time to rearrange their affairs (eg by selling their property) under the current rules should they choose to do so.
However, for those currently involved in divorce and finance proceedings, it is important that consideration is given to:
- Possible CGT exposure, particularly where one party has moved out of a property (or intends to do so) and where it is also possible that the property will be sold.
- Where appropriate, the impact of any property transfers which could take place during the course of proceedings, in order to mitigate any potential CGT liability.
Suzanne Grant is a member of the firm’s forensic team and has many years of expertise of advising on complicated financial matters arising upon divorce and separation. She can be contacted at our Harrogate office on 01423 532600.