Changes to Principal Private Residence Relief – Could you lose out on a valuable tax relief?

From April 2020, HM Revenue & Customs are changing the following tax reliefs:

Principal Private Residence Relief (PPR)

When you sell a property that has been your main home for only part of the period you owned it, the last 18 months of ownership is a deemed period of occupation for purposes of the relief. This exemption period will be reduced from 18 months to only 9 months for disposals after April 2020.

Lettings Relief

Lettings relief is available when you sell a rented property that you previously occupied as your main residence prior to letting. This is a very generous relief which reduces a chargeable gain that may arise upon disposal.

From April 2020, they are restricting this relief so it will only apply in situations where the owner of the property is in shared occupancy with the tenant. Therefore, leaving number of individuals in a worse tax position.

Example

Mr Smith is a higher rate taxpayer and owned a property for 10 years. This was his main residence for 5 years, and he subsequently let out the property for the remaining 5 years. He bought the property for £150,000 and it is currently valued at £300,000. The capital gains calculations pre and post April 2020 are:

Pre-April 2020Post April 2020
Chargeable Gain£134,000Chargeable Gain£134,000
PPR Relief-£87,100PPR Relief-£67,000
Lettings relief-£40,000No Lettings Relief 
Taxable gain before AE£6,900Taxable gain before AE£67,000
Annual Exemption-£12,000Annual Exemption-£12,000
Taxable Gain£0Taxable Gain£55,000
Capital Gains Tax @ 28%£0 Capital gains Tax @ 28%£15,400
    

If Mr Smith sold his property post April 2020 to an unconnected third party, he would incur capital gains tax of £15,400. In comparison to a tax bill of £0, if he sold pre April 2020.

What next?

If you have a property which qualifies for these reliefs, don’t wait until after April 2020, please contact a member of the tax department now, so that we can discuss the next steps and what other tax implications may need to be considered.

 

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