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Details of new HMRC restrictions on private residence relief

Monday, 1 April, 2019

HMRC has launched a consultation on changes to private residence relief (PRR) from capital gains tax (CGT) that were announced at Budget 2018.

As from 6 April 2020, lettings relief will be restricted to owners who share occupancy with a tenant. Lettings relief was introduced in 1980, to allow people to let out spare rooms within their property on a casual basis without losing the benefit of PRR. In practice, however, HMRC has found that lettings relief is being used for purposes beyond the original policy intention, benefitting those who let out a whole dwelling that has, at some stage, been their main residence.

The reforms mean that lettings relief will not be available for periods where an owner has moved out of the property and therefore no longer shares occupation with a tenant or tenants. This effectively abolishes it for buy-to-let purposes. The impact on a typical landlord will be to increase the chargeable gain on disposal by up to GBP40,000.

The final-period exemption from CGT will also be reduced from 18 months to nine months. This exemption was originally 36 months when first introduced during a property market slump, as a concession for people who were unable to sell their former home after moving to another. It was reduced to the current 18 months by the Finance Bill 2014, although there are special rules to allow disabled homeowners and those who go into residential care to claim the full 36 months relief. These will not change in the current reforms.

Both changes will come into effect for disposals on or after 6 April 2020, affecting around 40,000 people each year. From that date, only those periods where the owner was in shared occupancy with the tenant will qualify for lettings relief. Periods when it was let out before then will not qualify for any relief.

The government is also considering changing the rules on inter-spouse transfers, so that the receiving spouse always inherits the transferring spouse's period of ownership and the use to which the property was put during that time. This would, for example, prevent a person claiming full PRR on the disposal of a house that their spouse had previously owned and let out.

Sources