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Principal Private Residence (PPR) Relief and Lettings Relief Changes

The Government announced in its 2018 budget proposed changes to the application of PPR and lettings relief. These changes are subject to a consultation process but, if implemented, will impact property sales taking place from 6 April 2020 in a retroactive manner.

PPR relief exempts all or part of the capital gain arising on the sale of a property which you have used as your only or main residence. A gain will only arise where you have been absent from the property at some point during your ownership.

Currently, the PPR rules treat the last 18 months of your ownership as a deemed period of occupation regardless of whether you actually resided at the property during this time. However, this deemed period will reduce to 9 months where your property is sold post 5 April 2020. This may act to increase the chargeable capital gain arising on the future sale of the property.

Also, if you have let a property which has at some point been your main residence, you will currently benefit from lettings relief. Lettings relief acts to reduce your chargeable capital gain on sale in relation to let periods. However, for sales taking place post 5 April 2020, it is proposed that lettings relief will only be given for periods where an owner is in shared occupancy with a tenant. This change could act to increase your Capital Gains Tax (CGT) bill by as much as £11,200 (or £22,400 as a couple).

Example of the impact of the proposed changes:

• Miss Wise purchased a house for £200,000 on 6 April 2000
• She sold the house for £500,000 on 5 April 2020.
• During 20 years of ownership:
- Miss Wise lived in the house as her only residence for 15 years
- Miss Wise then let the entire property for the last 5 years before sale.

Until 5 April 2020:
Gain – £300,000
PPR Relief – (£247,500)
Lettings Relief - (£40,000)
Taxable Gain – £12,500

6 April 2020:
Gain – £300,000
PPR Relief – (£236,250)
Lettings Relief – -
Taxable Gain – £63,750

• This illustrates how selling just one day later, and being subject to the new changes, could see a £51,250 increase in the level of taxable gain.
• Where Miss Wise is a higher or additional rate taxpayer, this could see her having to pay up to £17,850 of CGT where only a maximum of £3,500 of CGT is due under the current rules!

The ICAEW has recently published commentary on the consultation and outlines its concerns with the proposed legislation, particularly its retroactive nature.

It is noted that lettings relief, in particular, was introduced in 1980 to help alleviate a housing shortage and, despite there still being a housing shortage, the proposed changes will reduce the relief to meaningless. Where a PPR is in shared ownership, the gain will normally already be covered by PPR relief.

It should also be emphasised that lettings relief is already much less valuable than it used to be. The maximum lettings relief that can be claimed has remained at £40,000 since first introduced in 1980 and would be equivalent to approximately £170,000 today. Further, the rate of CGT was 30% in 1980 whereas the rate of CGT today is either 18 or 28% for residential property.

It is therefore hoped that HMRC will reconsider these proposed changes. It is not always possible to sell a home before the purchase of a new home and these changes are going to unfairly impact those in this situation, particularly those taxpayers who become ‘accidental landlords’ as a result of being unable to sell an old home. The proposed final 9 month PPR exemption period also contrasts with the replacement main residence rules currently in place for Stamp Duty Land Tax (SDLT) purposes. The SDLT rules allow a purchaser 36 months to sell their former residence for the purposes of recovering the surcharge rates of SDLT payable where more than one home is owned at completion.