Many think that selling their own home is tax-free. In this blog, I outline examples of when this might not be the case.
Private residence and lettings relief
Principal Private Residence Relief (PPRR) is a Capital Gains Tax (CGT) relief which makes the sale of a person’s home exempt from CGT if certain conditions are met.
As a rule, if you own one home which you live in and then sell, any gain you make will not be taxed. What happens if you lived elsewhere and for whatever reason let your old home out?
The existing rules allow PPRR for some specified absences from the property. The government is now making changes to these rules which will have the effect of reducing the amount of PPRR available in certain circumstances. I cover the more important ones below.
All of the changes mainly apply to transactions undertaken from 6 April 2020.
Change 1 – transfers between married couples
The general rule for CGT is that transfers of assets (including homes) between married couples and civil partners take place on a no-gain/no-loss basis.
The PPRR rules further provide that where one spouse transfers their only or main residence to the other, the receiving spouse inherits the other spouse’s period of ownership of the dwelling even if that period started before marriage.
However, this rule does not apply to a dwelling which is not their main residence at the time of the transfer.
To ensure consistency, a new rule says that when a spouse or civil partner transfers an interest in a dwelling to their spouse or civil partner (whether or not the dwelling is their only or main residence at the time), the receiving spouse or civil partner will inherit the transferring spouse or civil partner’s ownership history, including their previous use of the property.
Change 2 – the final period of ownership
The final period of ownership of a person’s home will usually be tax-free, whether they occupy it or not. This final period exemption was 18 months and will fall to 9 months. The relief for those with a disability, and those in or moving into care remains 36 months.
Change 3 – lettings relief
The original idea of lettings relief was to allow people to let out spare rooms in their homes without losing the benefit of PPRR. The government thinks that lettings relief is too generous and gives relief to those who let out their whole homes. The new rules are:
“Where a gain arises on a person’s home and, at any time in the individual’s period of ownership; part of the dwelling-house is the individual’s only or main residence; and another part of the dwelling-house is being let out by the individual as residential accommodation otherwise than in the course of a trade or business, then lettings relief may be due.”
The result of this is that lettings relief will only be available for those lettings periods where an owner shares their property with a tenant or tenants.
HMRC example of where the letting changes have effect
Eric purchased a house for £200,000 on 1 January 2000. He sold it for £350,000 on 31 December 2020. During Eric’s 20-year (240 months) ownership he:
- lived in the house as his only residence for 17 years (204 months),
- let the entire property for three years (36 months) before selling it.
The net gain is £150,000 and PPRR will be available for the period Eric occupied the house as his main home which is 204/240 months. This means that of the gain £127,500 is eligible for relief, leaving a potential gain liable to CGT of £22,500.
Eric also qualifies for nine months of final period exemption which is £5,625. This reduces the potential taxable gain to £16,875 (£22,500 – £5,625).
As Eric was not in shared occupancy with his tenants, lettings relief does not apply for the three years that he let the property (if the sale had been before 6 April 2020, this gain would have been eligible for letting relief).
If Eric has not used his annual exempt amount for the year (which for the year 2019/20 is £12,000) he can further reduce the taxable amount to £4,875 (£16,875 – £12,000). If Eric is a higher rate tax payer he will pay CGT of £1,365 (£4,875 x 28%).
Change 4 – accelerated reporting and paying tax
At the moment a capital gain is reported on the tax return covering the year in which the gain occurs. Any CGT is paid on the gain 31 January following the tax year in which the disposal is made.
New rules accelerate the reporting requirements on the sale of all UK residential properties. These will include residential investment property and sales of a person’s home which are not fully covered by PPRR. In such cases a special return is required. It should be completed within 30 days of completion of the property sale.
In addition, where a tax payer makes such a return and tax is notionally chargeable, then they are liable to pay the tax on account on the filing date for the return.
What to do next?
If you think that any of the changes may apply to your home, please get in touch so we can review the possible implications for you. Email firstname.lastname@example.org