George Bull

Written by: George Bull

George Bull

Senior Tax Partner

Cuts to main residence exemption: what should you do?

To better focus Private Residence Relief (PRR) for owner-occupiers, from April 2020 the government will change two ancillary reliefs that provide relief on rented property and on gains made in the final period of ownership, regardless of occupancy.

All taxpayers have an annual exempt amount (currently £11,700) below which Capital Gains Tax (CGT) is not due on any gains. But when individuals sell their main residence, they generally do not have to pay CGT on any gains made in that sale because most sales are protected by PRR.

To protect gains made by people in certain circumstances, there are several ancillary reliefs that extend the benefit of PRR beyond those who are occupying their main residence. For example, when somebody is absent from their main residence for any reason, the gains they make for up to three years before sale are protected. Other reliefs protect gains when people work away from their main residence and gains made when living in employer-provided accommodation.

That was then and this is now. From April 2020 the rules on two ancillary reliefs will change. The period during which the property was someone’s main residence will still be protected.

Lettings relief

Lettings relief currently provides up to £40,000 of relief (£80,000 for a couple) to those who let out a property that is, or has been in the past, their main residence. This means that individuals can claim the relief on a property even if they have not lived in it for a long time.

From April 2020 the relief will change and only be available to those who are in shared occupancy with a tenant.

Final period exemption 

Final period exemption currently means people do not have to pay CGT on gains made in the final 18 months of ownership, even if they are not an owner-occupier during that period.  

However, a long exemption period means that more relief can accrue on two properties (an unsold one and a new one) simultaneously. The government feels that this is out of line with the intention of the exemption, which is meant to protect those who move to a new main residence but are unable to sell their original home immediately.  

From April 2020, the final-period exemption will be reduced to nine months. This is still twice the length of an average property transaction. Fortunately, the special rules that give those in or moving into care homes, and people with a disability, 36 months of exemption will not change.

So what does this mean in practice? The government believes that this timetable will give people sufficient time to re-arrange their affairs (ie by selling their property) under the current rules should they wish to do so. Our view is that time passes quickly. If you had intended to rely on these ancillary reliefs to reduce your tax bill when selling a property which has been your main residence, you have less than 18 months to work out how these changes will affect you, and what to do about it. With that in mind, we will be keeping a careful eye open for HMRC's explanation as to exactly how the new lettings relief test will work. For example, if you sell the property after 5 April 2020 do you retain lettings relief which you have accumulated on the old basis, or will the slate be wiped clean unless you meet all the requirements of the new test?

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