Upcoming UK property tax changes

HMRC are introducing some very significant changes next year, which might seriously increase the Capital Gains Tax (CGT) that you will pay on the sale of any properties.

These changes will affect you if you have a property which was once your main residence but you now either let or have retained, possibly as a weekend retreat. It is important that you understand the changes, as it is likely to result in you having to pay significantly more CGT when you do decide to eventually sell or transfer these properties.

There are two important changes coming into effect from 6 April 2020.

1. Lettings Relief Reform

Lettings relief was introduced back in 1980. It was designed to ensure that people could let out spare rooms within their homes on a casual basis, without jeopardising the Principle Private Residence (PPR) Relief status, that came with that property being their main home. Without this, homeowners risked losing PPR Relief if they rented out spare rooms, giving rise to a capital gains tax liability when it was eventually sold.

In practice however, the relief extended much further than the original policy intended and has come to benefit most of those who let out whole dwellings rather than just spare rooms, which at some stage had been their main residence.

Under the original lettings relief, the qualifying gain on the sale of a residence does not incur a taxable gain, to the extent that is the lowest of:

  • The amount of PPR Relief already calculated; or  
  • £40,000; or
  • The amount of the chargeable gain relating to the letting

In a nutshell up to £40,000 of a gain was exempted from tax, if the vendor qualified for the relief.

HMRC are now looking to limit the availability of lettings relief by restricting it to those who ‘share occupation’ of their house with a tenant for all disposals made on or after 6 April 2020.

What is Shared Occupation?

Shared occupation is considered to apply where the owner is living in the same dwelling as a tenant and continues to occupy that dwelling as their only or main home throughout the period of the letting.

The reformed lettings relief will not be available for those periods where an owner has moved out of the property and no longer shares occupation with the tenant.

This has significantly increases the tax payable for anyone who has let out their home for any period, whilst not living there

2. Reduction of PPR Final Period Exemption

Currently, if a property has ever been your PPR, in most cases, the last 18 months of ownership of that property is deemed to be your PPR and is therefore exempted from tax.

Considerations

  • Are you letting a property which was once your main residence? If so, it is worth reviewing the likely CGT position to establish any additional tax which might become payable if you sell it after 6 April 2020.
  • If you are thinking about selling or gifting a property within your portfolio, you should consider which properties these changes are likely to effect.
  • If you own a property jointly, under the current rules you would each be entitled to the exemptions, so these changes will inevitably have an even greater impact on the overall CGT position.
  • Where you are the sole owner of a property, it is worth considering transferring ownership to your spouse, to ensure you both fully utilise your CGT annual allowance.
  • It is easy to become an ‘accidental’ higher rate taxpayer, so it is important to take the time to plan future property sales, to minimise your exposure to this.

You can read an example of how these changes would work in practice in Real Estate Matters issue 13.

For further advice on any of the above, please get in touch with a member of our specialist Construction and Real Estate team on 01903 234094.