28th February 2020 - Alicia Buckingham

Capital Gains Tax changes on sale of your Principal Private Residence

Principal Private Residence (PPR) relief is a valuable Capital Gains Tax (CGT) relief. Simply put, if you have occupied your property throughout the time you have owned it, there will be no CGT payable on disposal.

However, if there has been any period where you did not occupy your home e.g. lived abroad, CGT may apply on sale. As with most taxation rules, there are some concessions granted to us where HMRC allow you to ‘deem occupation’ so, although you didn’t live there, relief still applies.

One of the main “concessions” is the final period exemption. Basically, even if you did not occupy your home for the last 18 months you owned the property, HMRC will exclude this period for any CGT calculation.

18 months to become 9 months

The 2018 Budget set out several changes to PPR relief including a reduction in the final period exemption from the current 18 months to 9 months. Considering that pre 2014 this was once 3 years, 9 months is a considerable decrease.

The 2019/20 Finance Bill confirmed this reduction will take place from April 2020. It should be noted that the extended exemption allowing 36 months relief for the disabled and those moving into a care home will not change.

The charge

CGT on residential property is charged at 28% on any amount above the basic tax rate (18% where within the basic Income Tax band).

In addition, if another property is purchased while the family home remains your main home, you will be required to pay the 3% stamp duty surcharge applicable to second homes.

How could this affect you?

Your first instinct might be that these changes won’t affect you, as you will never be in a position where you own more than one home or won’t be living in your Principal Private Residence.

But, consider the scenario where you wish to sell your property and have already found and bought your dream home. If you are stuck in a chain when selling your old residence, a nine month’ period until a potentially hefty tax bill is triggered suddenly doesn’t look that long.

Kate Francis, a Senior Associate at Pinsent Masons, has also considered this change in relation to divorcing or separating couples;  “from 6 April 2020, the spouse who moves out of the family home will only have a nine-month window in which to sell their interest before CGT applies to the proceeds of the sale, instead of the 18 months that currently applies”.  

They will then be in a position where they must persuade their ex-spouse to agree to the sale of the family home within nine months, or otherwise be subject to a CGT charge on their portion of the home. The alternative would be to continue to live together after separation which, apart from being potentially unpleasant for all involved, could complicate the divorce process itself.

This change to the final period exemption could therefore impact any individual who finds themselves in the position where they have purchased a new home before completing the sale of their existing home.

We would encourage everyone to seek professional financial planning advice if, after reading this article, you are left with any concerns or questions.

Further reading is available at:

https://www.pinsentmasons.com/out-law/analysis/divorcing-couples-beware-the-capital-gains-tax-trap

https://www.thetimes.co.uk/article/beware-the-nine-month-capital-gains-tax-trap-k8w9sndhb

Share this article: