At its simplest level any gain on the sale by a taxpayer of his or her only residential property, which the taxpayer has occupied as his or her home since its acquisition, should be exempt from capital gains tax.
There are, however, a host of ancillary rules that govern the extent and availability of this exemption in more complex circumstances. In the 2018 Budget the government announced that it intended to restrict two of these supplementary reliefs with effect from 6 April 2020. The proposals are currently subject to a consultation but potentially affected property owners will need to start planning now if they wish to avoid the impact of the anticipated changes.
The proposals are as follows:
1. What is known as the “final period exemption” would in most cases reduce from 18 months to 9 months. This exempts the gain deemed to arise during the final period of ownership even if the property is not the only or main residence during this period.
2. The second proposed restriction is to “lettings relief”, which reduces the gain on a property qualifying for the main residence exemption by up to £40,000 per owner where the property was let to residential tenants, rather than owner occupied, for part of the period of ownership. From April 2020 this relief would only apply where the owner is in shared occupancy with a tenant.
If enacted these changes will be a further blow to the buy to let sector which is already coming to terms with the abolition of the wear & tear allowance, the incremental restrictions on tax relief for loan interest paid and the imposition of higher rates of stamp duty land tax.
Any property owners potentially adversely affected by the proposed changes should consider whether they wish to sell their properties before 6 April next year to ensure that they continue to benefit from the existing regime. Where the existing rules shelter all or a large part of the gain, but the position would be very different after April next year, consideration could be given to the possibility of a transfer to another vehicle under the control of the current owner in order to crystallise a disposal without losing economic control of the asset.
By Tax Partner, Michael Marsh