Posted by Laura Kearns, Associate
Budget 2018 – Further steps by the Government to limit tax reliefs available to owners of multiple properties
This week’s budget was not exactly ground-breaking for Private Wealth clients and their advisers, although this was no doubt a welcome break, particularly for international clients, following the significant non-dom changes introduced from April 2017 and April 2018.
However, one area which was on the Chancellor’s agenda was that of Principal Private Residence Relief or PPRR.
The Chancellor’s proposed changes
The proposed changes to the availability of PPRR announced this week relate to:
- the grace period which allows individuals to continue to benefit from PPRR even though a property has ceased to be their only or main residence, and
- the associated ‘lettings relief’.
Whilst far from a radical overhaul, these two changes to the PPRR rules are ones in a series of measures introduced over recent years (such as SDLT surcharge on second homes) indicating that the government is committed to tightening the position for landlords and other individuals owning multiple properties.
It is expected that the government will consult on these changes before their introduction from 6 April 2020.
By way of reminder, PPRR is an important tax relief which means that individuals can sell their ‘only’ or ‘main residence’, without being subject to capital gains tax (‘CGT’).
As ever, the current rules are complex and contain a number of exemptions and concessions which clients can utilise to reduce any potential CGT liability on the sale of residential property.
The general rule is that PPRR can only be claimed for periods when the property has been the individual’s only or main residence.
However, the final 18 months of an individual’s period of ownership will always qualify for relief, regardless of whether he is still in occupation for that period of time, as long as the property has at some point been his only or main residence.
Prior to 6 April 2014, this grace period was in fact 36 months but was shortened to 18 months thereafter. It is now proposed that this period will be cut further so that from 6 April 2020, individuals will only be able to claim PPRR for the final 9 months of their ownership.
This will clearly impact those clients who are disposing of one of a number of properties. It is not intended however to affect individuals who no longer occupy a property as their only or main residence due to disability or moving into care. For these individuals, the pre-April 2014 grace period of 36 months will still apply.
If an individual resides in a property for 6 years and then lets the property out for 6 years, he is only entitled to claim PPRR for the 6 year period in which he was in occupation. As such, the starting point is that 50% of the gain made in the 12 year period will be subject to CGT at the residential property rate of 28%.
At present, it is possible for the individual to claim a further relief – lettings relief – for the period in which the property was let as residential accommodation. The amount of the relief is the lowest of:
- the amount of PPRR already calculated;
- £40,000; and
- the amount of any chargeable gain made in relation to the period in which the property was let.
However, it is now proposed that from 6 April 2020 it will only be possible to claim lettings relief if the landlord is in shared occupancy with the tenant.
The upshot of this restriction is that landlords could be liable for an additional £11,200 of CGT on the sale of property let on a residential basis if they are not in occupation with their tenants.
Laura Kearns is a Private Client lawyer who advises domestic and international clients on lifetime and succession planning, with a focus on associated tax issues. She has particular experience advising non-UK domiciled and non-UK resident clients in respect of their personal affairs.
For more information on PPRR and other tax issues contact Laura Kearns on
020 7282 4310 Email us
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