The latest Finance Bill includes important changes to private residence relief (PRR) that took effect from 6 April 2020:
- The first change is to limit to just 9 months the period prior to disposal that counts as a period of deemed occupation and thus exempt from Capital Gains Tax (CGT) even though the owners are not living in the property during that period.
- The second is to limit “lettings relief” to periods where the taxpayer is in shared occupation with the tenant.
Final period exemption now reduced to 9 months
The final period exemption was for many years the last 36 months which was felt to be too generous. The period was then reduced to the last 18 months and has now been further reduced to the last 9 months.
The final period exemption will remain at 36 months for those with a disability, and those in or moving into care.
CGT Lettings Relief Changes
Lettings relief provided a further exemption for capital gains of up to £40,000 per property owner.
The additional relief was introduced in 1980 to encourage people to let out spare rooms within their property on a casual basis without losing the benefit of PRR, for example where there are a number of lodgers sharing the property with the owner. It no longer applies where property owners rent out their former main residence.
Those who are renting their property temporarily whilst working elsewhere are unlikely to be affected by this change as there are alternative reliefs available under those circumstances.
New system for reporting CGT on property disposal started 6 April 2020
A new CGT reporting and payment on account system was introduced for residential property disposals by UK resident taxpayers from 6 April 2020. The new system as originally announced required the disposal to be reported and any CGT due to be paid on account within 30 days of completion. HMRC have now announced that for disposals between 6 April and 30 June there will be no penalty provided that the return is made by 31 July 2020 although HMRC will still charge interest!
CGT business asset disposal relief lifetime limit just £1 million
In the March 2021 Budget, it was announced that CGT Entrepreneurs’ relief (ER) was replaced by CGT Business Asset Disposal relief (BADR) for disposals on or after 11 March 2020.
It was also announced that the 10% CGT rate would only apply to the first £1 million of qualifying gains in the taxpayer’s lifetime and many business owners have misinterpreted how this limit applies. Unfortunately claims under the predecessor ER need to be taken into consideration so if £750,000 ER has already been claimed only the first £250,000 of qualifying gains after 11 March 2020 would qualify for BADR.
Any gains in excess of that amount would be taxed at normal CGT rates, currently 20% for higher rate taxpayers.
Has your rental property been impacted by the changes to CGT, lettings relief or private residence relief? If you’d like some independent, impartial advice please get in touch with our team of expert tax advisors.