What The Changes To Private Residence Relief Mean For Landlords

Sarah Bradford explains how the changes to private residence relief and lettings relief announced in the Autumn Budget 2018 will impact on landlords. 

 

From a tax perspective, landlords have had a difficult time of it of late, and the tax attacks on landlords show no signs of abating.  

 

In the Autumn Budget 2018, the chancellor announced a number of measures that will adversely affect landlords – a reduction in the final period exemption for private residence relief, and a curtailment of lettings relief. In addition, as previously announced, the payment window for paying capital gains tax (CGT) is to be reduced. 

 

Private residence relief (PRR) – also known as ‘main residence relief’ and ‘principal private residence relief’ – prevents a CGT liability from arising on the disposal of a property which has, throughout the period of ownership, been the taxpayer’s only or main residence. 

 

The effect of ‘only or main residence’ status is not just to shelter the gain attributable to the period of ownership during which the property is occupied as such; it also shelters the gain attributable to the final period of ownership and opens up the possibility of lettings relief to further reduce the chargeable gain. Consequently, ensuring that a property has ‘only or main residence’ status at some point during the taxpayer’s period of ownership can be very effective in mitigating any CGT liability that may arise on sale. 

 

Lettings relief shelters part of a gain arising where a property which has been let has at some point been the taxpayer’s only or main residence. This is a valuable relief and can shelter gains of up to £40,000 (saving CGT of up to £11,200). However, it was announced in Budget 2018 that the relief is to be reformed, and from 6 April 2020 it will only be available where a new ‘shared occupancy’ test is met. 

 

Where property has been the taxpayer’s only or main residence at some point, the final 18 months of ownership (36 months when the owner moves into care) is exempt from CGT. This is known as the ‘final period exemption’. It was announced at the Budget that the final period of ownership would be reduced from 18 months to nine months, with effect from 6 April 2020 (see below).  

 

The combination of private residence relief, lettings relief, and the final period exemption can be particularly useful to landlords. In their current form, the reliefs can be quite generous, and with careful planning can be used to significantly reduce, or even eliminate, the gain that would otherwise arise on the sale of a let property.  

 

The curtailment of both lettings relief and the final period exemption from 6 April 2020 will reduce the ability of landlords to benefit from the combination of these reliefs to maximise the amount of tax-free gain. However, as the changes are not due to come into effect until 6 April 2020, there is time to benefit from the current, more generous, reliefs and to mitigate the effects of the changes. 

 

Occupying the let property as the individual’s only or main residence at some point during the period of ownership not only shelters the gain relating to the period for which the property was occupied as the main residence, and also that relating to the final period of ownership, it also opens up the possibility of claiming lettings relief to further reduce the chargeable gain. 

 

Lettings relief is available where a gain arises on the disposal of a property which: 

Currently, the amount of the relief is the lowest of the following three amounts: 

It was announced at the time of Budget 2018 that lettings relief is to be curtailed. From 6 April 2020, it will only be available for ‘properties where the owner is in shared occupancy with the tenant’. 

 

We do not know yet what this curtailment will look like – the government is to consult on the details. However, the relief in its current form is available to 5 April 2020.  

 

Where a property is currently let, the landlord may wish to take action now to preserve entitlement to lettings relief. If the property has not been occupied as the taxpayer’s main residence at any time, the landlord might consider occupying the let property as such, to open up the possibility of lettings relief (and also the final period exemption). There is no minimum period of occupation necessary to tick the ‘occupied as an only or main residence at some point’ box – what is important is the quality of occupation. The landlord must occupy the property as his main home, rather than simply elect for it to be his or her main home for CGT purposes. 

 

If the landlord is considering selling the property in the near future, and the property has at some time been an only or main residence, it may be advisable to do so before 6 April 2020 – not only to maximise lettings relief, but also shelter the gain relating to the final 18 months of ownership from tax before the final period exemption is halved. 

 

The final period exemption is a valuable element of private residence relief, bringing the last 18 months of ownership within the ambit of the relief, regardless of whether the property is occupied as the main residence at that time.  

 

The availability of the final period exemption is very valuable in increasing the amount of private residence relief in a number of situations, e.g. if the owner moves out of the property before it is sold, either because it is let or because the taxpayer moves to a new home and there is a delay in selling the old home. It is also a valuable planning tool where the taxpayer has more than one residence and wishes to maximise the availability of PRR. It can also increase the amount of lettings relief available where the amount of private residence relief determines the amount of lettings relief available. 

 

As indicated above, the Chancellor also announced in his Budget 2018 speech that the final period exemption would be halved from 18 months to nine months, although the 36-month final period exemption available to disabled people and those moving into care would remain unchanged. The change is to take effect on 6 April 2020. If the legislation mirrors that introduced when the final period exemption was reduced from 36 to 18 months in 2014, exchange of contracts will need to take place prior to 6 April 2020 with completion by 5 April 2021 in order to benefit from the current 18-month final period exemption.  

 

Where a sale is on the cards, landlords may consider selling before 6 April 2020 to maximise availability of the final period exemption. 

 

New rules are to be introduced, which will require a payment on account of the CGT in respect of any chargeable gain arising on the sale of a residential property to be made within 30 days of the date of the disposal giving rise to the residential property gain.  

 

The payment must be made at the same time as a return, which must be filed within the 30-day window. This measure will have cash flow implications – currently, the tax is payable by 31 January after the end of the tax year in which the sale occurred. 

 

For UK residents, the measure will take effect from 6 April 2020. 

 

Landlords looking to sell a buy-to-let property may wish to consider disposing of the property by 5 April 2020, having first occupied it at some point as an only or main residence, in order to benefit from lettings relief and the final period exemption in their current format.