In two stealthy moves, the Chancellor used the 2018 Budget to raise some extra capital gains tax from certain individuals when they sell their home. Could this include you?
Selling tax free
As you probably know, if you make a gain from selling your home it’s exempt from capital gains tax (CGT) because of private residence relief (PRR). Even you haven’t used a property as your home for extended periods, for example if you live elsewhere because of your job, PRR can still apply. In addition, the last 18 months of ownership are always CGT free, regardless of whether you occupy the property or not. This means you could move into a new home before selling the old one without losing any PRR. However, the 2018 Budget included two important changes to the PRR rules.
First change – ownership period
The 2018 Budget reduces the PRR for the final period of ownership to nine months (instead of 18) with effect from April 2020. This means if you buy a new home, move out and the property doesn’t sell within nine months you could face a CGT bill when you do finally find a buyer.
Tip. Special rules currently allow PRR for the final 36 months of ownership if you’re in, or moving into, a care home or have a disability. This won’t change as a result of the Budget.
If you lose some or all of your PRR and this results in a capital gain a CGT bill won’t always follow. Your annual CGT exemption, £12,000 from 6 April 2019 (if you haven’t used it against other gains) reduces the taxable amount. If there are joint owners they can also use their annual exemption to reduce the tax on their share of the gain.
Second change – letting relief
Currently, if you let your home PRR includes a bonus in the shape of an extra relief which can reduce the taxable amount of any capital gain you make from selling your home by up to a maximum of £40,000. The Chancellor has decided that this letting relief is to be withdrawn from April 2020 unless you occupy part of your home or share it while letting it.
Check your circumstances
The once simple PRR is becoming more complicated year-on-year. If you’ve occupied a house as your main residence for a while, but you’ve also lived somewhere else, the Budget raises the chance of a CGT bill. In future when you sell your home you’ll need to consider the CGT position if you’ve been absent from your home for one or more extended periods during your ownership.
Trap. While some absences are ignored, this might only apply if you re-occupy your home after the absence.
CGT changes in the pipeline
In an obvious attack on landlords, although it may affect others, the Chancellor confirmed that from April 2020 anyone who makes a capital gain from selling residential property which is not covered by an exemption or relief will have to declare and pay an estimate of the CGT within the following 30 days.