Increased CGT for owners of second properties
Finance Bill 2019-20 was published on 11 July 2019. Despite robust debate and lively responses to the consultation document “Capital Gains Tax: Private Residence Relief: changes to the ancillary reliefs” (PRR), there is likely to be disappointment that some of the proposals will be enacted from 6 April 2020. This creates a “cliff edge” for many individuals with second properties which were once their main residence.
HMRC suggests that changes are necessary to make certain aspects of the PRR fairer and reiterates that relief should be targeted at owner-occupiers. However, in reality, it will simply generate more capital gains tax and does nothing to simplify the calculation of the relief.
Without any recognition of the difficult property market, if someone needs to move and cannot sell their existing property, the final period exemption is reduced to nine months. The original 36-month exempt period is only retained where someone has a disability or is moving into care. This change alone is expected to affect around 40,000 individuals a year.
Many people who have retained properties and let them after moving into a new main residence will be hit by the restriction on lettings relief. The relief will only be available where landlords share occupancy with their tenants. With the relief currently worth up to £40,000 per taxpayer, this will increase the tax take significantly as it is unlikely that the shared occupancy requirement will be met.
Both these changes will apply from 6 April 2020 resulting in an immediate increase in capital gains tax exposure for many. If you own a second property that was formerly your main residence, make sure you have crunched the numbers. You need to understand how much your tax exposure will have increased by, as it might influence your decision to sell or keep the property.
Some existing concessions will be legislated. There is recognition that, as many new homes are bought off-plan, there might be significant delays in taking up occupancy but a maximum 24 months of relief will be available irrespective of the contractual arrangements. There is some common sense being proposed regarding the spousal transfer rules and how one spouse’s occupation history can be transferred to the other. That is especially welcome for those who are marrying or entering into civil partnerships and already own property.
All in all, there are no surprises. As these tax reliefs are withdrawn, property owners will be affected.