Capital Gains Tax Planning – plan ahead for April 2020 changes

In recent years, landlords and those with second homes have been on the receiving end of numerous tax changes, which have hit them in the pocket.

This trend shows no signs of abating – more changes are imminent, which will have the effect of restricting lettings relief and halving the final period exemption.

Kelly Garside, Tax Director at Cowgills explains why it might be worth considering advancing planned disposals of certain qualifying properties to on or before 6 April 2020 in order to take advantage of the more generous rules for lettings relief and the longer final period exemption which are currently in place.

Private residence relief

Private residence relief is a Capital Gains Tax relief which shelters gains arising on the disposal of a property which is currently or has previously been, the owner’s only or main residence.

If the property has been the only or main residence throughout the period of ownership, the relief applies in full. Reduced relief is available where the property has been the only or main residence for only part the period of ownership.

So, there are significant advantages to occupying a property as a main residence, even if only temporarily – private residence relief is available for the period for which the property is occupied as such, and it also opens the door to further reduction, such as the final period exemption and lettings relief.

Note though, that changes to be introduced on 6 April 2020 will reduce the benefit of these reliefs.

What is the final period exemption?

If a property has been occupied as an only or main residence during the period of ownership, the gain arising in the ‘final period’ is exempt from Capital Gains Tax. The final period is currently 18 months, or 36 months where the person making the disposal is disabled or a long-term resident in a care home.

What changes from 6 April 2020?

From 6 April 2020, the final period reduces to 9 months although it will remain at 36 months for disabled persons and long-term care home residents.

So, if you are thinking of disposing of a property which has been a main residence at some point –  such as a former home which has been kept as a buy to let, it could be financially advantageous to dispose of the property on or before 6 April 2020 to benefit from the longer final period exemption.

What is lettings relief?

Lettings relief applies to shelter part of the gain arising on the sale of a property which has been let out as residential accommodation and which at some time was also the owner’s only or main residence. The amount of the letting relief is currently the lowest of the following three amounts:

• the amount of private residence relief available on the disposal;
• £40,000; and
• the gain attributable to the letting.

Under the current rules, periods of residential letting count regardless of whether or not the landlord also lives in the property.

What changes from 6 April 2020?

This relief is to be curtailed significantly from 6 April 2020.

From 6 April 2020, lettings relief will only be available where at some point the owner of the property lets out part of their main residence as residential accommodation and actually shares occupation of that residence with the individual. The individual must have no interest in the residence.

In short, lettings relief is lost unless the landlord shares the property with the tenant.

Where the gain that would otherwise be chargeable to Capital Gains Tax because it relates to the part of the main residence which is let out as residential accommodation, it is only chargeable to Capital Gains Tax to the extent that it exceeds the lower of:

• the amount of the gain sheltered by private residence relief; and
• £40,000.

In summary

The changes are not due to take effect until 6 April 2020, allowing people some time to benefit from the existing rules. Individuals who are planning to sell a property which has both been let out and, at some point, their main residence would be advised to consider advancing planned disposals to before 6 April 2020, to take advantage of the more generous rules for lettings relief and the longer final period exemption.