A change to Private Residence Relief could see more homeowners paying hefty Capital Gains tax bills on the sale of their homes.
Capital Gains tax is due if you sell an asset and make a gain on it. The gain itself is taxed, after an annual allowance has been deducted.
However, no Capital Gains Tax (CGT) is due when you sell or dispose of your main home, even if a large gain is made (Private Residence Relief). You can still enjoy this relief if you buy a new property before you have sold your home, provided that the sale of the old property occurs within 18 months.
From April 2020, these rules will change – and the 18 month window will be reduced to just 9 months. The Government has justified this by saying that a long exemption period results in more relief accruing on two properties (the unsold one and a new one) simultaneously which is ‘out of line with the intention of the exemption’. Consequently they have reduced the exemption, ‘to ensure that Private Residence Relief is better focussed on owner-occupiers’.
However, although the changes do not come into effect until next year, they apply from this month because the tax will be imposed on properties sold on or after April 2020.
Example: you put your property on the market now and while you are waiting for it to sell, you buy a replacement home this month. Your property sells on 15th May 2020. Even though the rules will have only just come into effect at that point, they will apply to you as they apply to all properties sold after April 2020 and more than 9 months has passed between purchasing your new property and selling your old property. CGT will be due and no Private Residence Relief will be available.
Note that the special rules applying to those in or moving into care homes and people with a disability (36 months of exemption) will not change.
How much would be due under the new rules?
This depends on how much gain you made, how much of your CGT allowance you have left and how much you earn. As an example, assume:
- You originally purchase your home for £375,000
- You sell your home for £500,000 after the new rules come into effect
- No Private Residence Relief is available as it takes you more than 9 months to sell the home after purchasing a replacement
- You originally incurred £5,000 of allowable costs when purchasing your home and £5,000 when you sold it, but you made no allowable improvements to the property
- You earn £40,000 a year and have a regular annual allowance
After allowances and deductions, £10,000 taxable gain is multiplied by a 18% tax rate (£1,800) and £93,000 taxable gain is multiplied by a 28% tax rate (£26,040). Your capital gains tax bill in this instance would therefore be £27,850.
Although the average time to sell a property is 4.2 months, there will be many times when this time window is exceeded. Factors such as market ‘heat’, the length of the chain of buyers and sellers involved in the transaction and survey problems can all impact this average, as can complications such as divorce.
Lettings relief change
In addition to the change to Private Residence Relief, a further change will be made to Lettings Relief. Currently up to £40,000 of CGT relief is available (£80,000 for a couple) where a property is let out that is or used to be your main residence. So, for example, if you decided in the past that rather than selling your main home that you would let it out and you then decided to sell it, you would have been able to claim this relief on any gain in the property price. From April 2020, this relief will only be available to those who are in shared occupancy with a tenant.
If you are concerned about the changes to either of these reliefs and would like advice, please call our property department on Southport 01704 532890 or Liverpool 0151 928 6544.