Capital Gains Tax on Homes
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When you sell an asset for more than you paid for it, generally speaking, you are liable to Capital Gains Tax (CGT) on the profit achieved. This does not though, subject to conditions, apply to the sale of your home – which in tax parlance is termed your Principal Private Residence (PPR). Private Residence Relief (PRR) is therefore a valuable tax relief that all taxpayers are eligible for when and however often they sell their home.
The situation is different when you own a property that is not your principal private residence – a second home for example – or where you move out of your home for a period of time whether or not you let the home out to tenants. In these situations, the property is either not your PPR or it wasn’t such for a period of time. The tax relief is then given in proportion to the period of time that you owned the house as your PPR.
Where you do rent out the property a maximum of £40,000 of Lettings Relief is available and is calculated as the lower of:
a. The amount of the gain made in the period the property was let out
b. The amount of the PPR relief obtained
After a consultation period ending in June 2019 the Government have announced changes to CGT on the sale of homes. These take effect from 6 April 2020. As a result, if you planned to sell a house that is either not your PPR or wasn’t for a period of time during your ownership then it may be worth considering doing so before 6 April 2020 rather than after this date as you are likely to pay less tax on any profits made.
Principal Private Residence Relief
The change to Private Residence Relief arises through a reduction in what is termed the “Final Period Exemption”. In essence this rule means that you currently treat the final 18 months of ownership as being a period of your PPR no matter whether you lived in the house or not. This period is being reduced to 9 months from 6 April 2020.
From 6 April 2020 this relief will only be available where you have let out part of your home and remained in residence in the rest of the home – for example rented out one bedroom in your home
Selling a house that will attract a capital gains tax charge after 6 April 2020 is likely to result in a significantly higher amount of capital gains tax payable. This additional tax charge could be avoided by bringing forward the sale to before this date.
The effect is perhaps best illustrated by an example.
John bought a house on 1 April 1980 for £100,000. He lived in the house for 4 years until the 31 March 1984 and then moved into another house when he married. John kept his first house and rented it to tenants from 1 April 1984. It has been occupied by tenants continuously since this date. John has agreed a sale of the house to the current tenant at a price of £425,000.
Depending on the date of the sale the capital gains tax position will be:
|Date of Sale||31 March 2020||30 April 2020|
|Profit on Sale||£325,000||£325,000|
|Period of Ownership||480 months||481 months|
|Period of Occupation as PPR||48 months||48 months|
|Final Period Exemption||18 months||9 months|
|Private Residence Relief||£325,000 x ((48+18)/480)= £44,688||£325,000 x ((48+8)/481)= £38,514|
|CGT Annual Exemption*||£12,000||£12,000|
|Capital Gains Tax Payable:|
20% Taxpayer - CGT @ 18%
40% Taxpayer - CGT @ 28%
*assumed same exemption value for 2020-21 as level not yet announced.
The example used in this illustration is entirely fictitious and is considered in isolation. A proper assessment of the taxation position would require an understanding of the taxpayer’s situation in the round. There may also be other reliefs available depending upon the reason for non-occupation.
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