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Changes to Private Residence Relief
Capital gains tax (CGT) is a tax on the profit you make when you sell (or ‘dispose of’) an asset that has increased in value. This includes assets such as a property or shares. It is the gain amount that is taxed, not the amount of money that you receive. It is not usually applicable to a house that is the taxpayer’s main residence.
Following the Governments announcement in its autumn 2018 budget and later confirmed in the Finance Bill 2019/2020, more landlords and owners of second homes could have to pay increased CGT on the sale of their additional property from 6 April 2020.
There are a number of exemptions that may help reduce CGT liability. Private Residence Relief (PRR) is an exemption that aids in reducing the amount of CGT payable on the sale of a property. PRR can exempt all or part of the capital gain arising if the property has been used as the taxpayer’s only or main residence. CGT will only be payable when the owner of the property has been absent at some point during the ownership of the property (or if the property does not comply with the remaining PRR criteria).
When a property is sold, the proportion of the gain that will be tax free is calculated by taking the number of months an individual (who owns the property) has lived in the property plus a deemed period of occupation. This figure is then divided by the number of months the property has been owned by the individual. Currently, PRR treats the last 18 months of an individuals ownership as a deemed period of occupation however, under the proposed new rules this period will be reduced to 9 months.
HM Revenue & Customs gives an example of how to apply the current rules on the Gov.uk website;
“You make a gain of £120,000 when you sell your home, which you owned for 12 years. You lived in the whole property for 6 years, and then you let it out in full for 6 years.
You get Private Residence Relief for the time you lived there (6 years). You also get relief for the last 18 months you owned the property, even though you were not living in it.
This means you get Private Residence Relief for 7.5 of the years (62.5% of the time) you owned the property.
You get Private Residence Relief on the same proportion (62.5%) of your gain. This means you will not pay tax on £75,000 of the gain.
The remaining 37.5% (£45,000) of the gain not covered by Private Residence Relief is your chargeable gain.”
Under the proposed new rules, the final exemption period is reduced from 18 months to 9 months. This reduces the PRR available to 56.25% of the gain. Therefore, in the example above, if the property was sold before 6 April 2020 the chargeable gain would be £45,000, after 6 April 2020 the total chargeable gain would be £52,500.
It should be noted that the deemed period of occupation for those who move into care or who are disabled will remain at 36 months.
Currently, the average time to sell a house in the UK in a standard property transaction is around 4.5 months. However, many people may find themselves in situations such as separation, divorce or drawn-out probate matters where complex issues can arise that mean the time it takes to sell a property is longer than the average. This could potentially lead to a higher CGT liability.