Following the announcement in Budget 2018 that some of the ancillary rules around principal private residence (PPR) relief for capital gains tax (CGT) purposes would change from 6 April 2020, the government has now launched a consultation on these proposed changes. Find the consultation here.

PPR relief is the relief which applies to the gain on a disposal of a person’s only or main residence and it has been a key feature of the legislation since CGT was introduced in 1965. There are a number of ancillary reliefs which are available, when a residence has not been a person’s only or main residence throughout the period of ownership and it is these ancillary reliefs which are now being targeted.

The first is the final period exemption. Originally 36 months, this was reduced to 18 months in 2014 and it is now proposed to reduce it further to 9 months in most cases. This exemption applies where a residence has not been an individual’s main residence throughout the whole period of ownership.

In this instance, the PPR relief is apportioned over the period of ownership, but the owner is treated as occupying the property for the final 18 months of ownership irrespective of whether they have or not. The intention behind the relief is to give owners a period of time to sell a property free of CGT after moving out.

Secondly, lettings relief will be restricted to cases where the owner shares occupation of their residence with a tenant. Currently it is available where a residence has previously been a main residence but is subsequently let. The most common example of this is a first flat where the owner upon perhaps marriage or graduation has subsequently purchased another property, moved into it and let out the first flat.

Currently on the eventual disposal of that property, in addition to PPR being available on an apportioned basis (including the last 18 months of ownership) lettings relief of up to £40,000 will be available against the chargeable gain. For a jointly owned property, lettings relief may be claimed by both parties, potentially wiping up to £80,000 off the chargeable gain.

With CGT on residential property being payable at up to 28%, the removal of this exemption combined with the reduction in the final period exemption could cost joint owners over £22,000 extra in CGT on the disposal of a property.

Although the government is consulting on these proposed changes it is very likely that they will be brought into effect from 6 April 2020. Current landlords should therefore take advice now with regards to any properties which might be affected – while there is still potentially time to give a tenant notice and sell the property before that date.

Combined with the income tax changes to mortgage interest relief and the removal of the wear and tear allowance, these proposed changes continue the theme of targeting private landlords.

For further information or to discuss how these changes could affect you, please get in touch.

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