CGT Lettings Relief proposed changes

[PinkDalek]

I posted along the following lines elsewhere on TLF today, relating to the 29 October 2018 Budget:

The Budget papers included (my bold):

Capital gains tax – To better target private residence relief at owner occupiers, from April 2020 the government will reform lettings relief so that it only applies in circumstances where the owner of the property is in shared occupancy with the tenant. The final period exemption will also be reduced from 18 months to 9 months. The government will consult on these changes. There will be no changes to the 36 months final period exemption available to disabled people or those in a care home.

I have yet to find the Consultation.

See also the following, being a brief one page background paper:

Budget 2018 Private Residence Relief: changes to ancillary reliefs https://assets.publishing.service.gov.u ... RR_web.pdf

Does anyone know if these changes have been enacted (wef 6 April 2020)?

[PinkDalek]

Answering my own question but I can't spot the proposed changes here:

Finance Act 2019 [enacted 12th February 2019]
http://www.legislation.gov.uk/ukpga/2019/1/enacted

Is anyone able to link to the Consultation, if there is one as yet (I've failed to find anything searching .gov.uk)?

[Spet0789]

Probably on the back-burner due to Brexit.

[PinkDalek]

Probablyly along those lines. I’ve now found this https://www.accountingweb.co.uk/tax/hmr ... full-draft which includes:

Main residence relief

Two further provisions which aren’t in this Bill are the proposed changes to main residence relief which I covered in CGT blow to homeowners. These changes are set to take effect from 6 April 2020, so there is plenty of time for consultation before the draft law is included in Finance Bill 2020.

If anyone spots the Consultation in due course, kindly link to it.

[Eboli]

Although I have no link, I do remember making these recommendations several years back, so I'll make some enquiries.

Eb.

[PinkDalek]

Although I have no link, I do remember making these recommendations several years back, so I'll make some enquiries.

I think the proposed consultation on changes to lettings relief and the final period exemption for main or only residence relief was mentioned in the Spring Statement papers today (as in 13 March 2019!).

Edit: Found it on page 7 here https://assets.publishing.service.gov.u ... ommons.pdf and from elsewhere, yet to be published.

[PinkDalek]

The Consultation is now available (noting the date of publication):

Capital Gains Tax: Private Residence Relief: changes to the ancillary reliefs
Consultation document Publication date: 1 April 2019 Closing date for comments: 1 June 2019
https://assets.publishing.service.gov.u ... eliefs.pdf

1. Introduction

1.4 In line with both those ongoing commitments, at Budget 2018, the government announced that two of the ancillary reliefs would change to better target PRR at owner-occupiers:

The final period exemption will be reduced from 18 months to 9 months, although the special rules that give those with a disability, and those in care, an exemption of 36 months will not change.

Lettings relief will be reformed so that it only applies where an owner is in shared occupancy with a tenant.

These changes will take effect from 6 April 2020.


Question 5 is a good one as it came up from time to time on TMF.

9. Summary of Consultation Questions

Question 1: Do you have any comments about the reduction of the final period exemption?

Question 2: Do you have any other comments about the reform of lettings relief?

Question 3: Do you believe there is a case for legislating to ensure that the benefits of job related accommodation will continue to apply to personnel who organise accommodation through the Future Accommodation Model?

Question 4: Do you have any comments on legislating these ESCs in their present form?

Question 5: Should the receiving spouse always inherit the ownership period and the use to which the property had been put in the past regardless of whether it is a main residence at the time of transfer?

[RossP]

Upfront apologies if this is a stupid question!

Background: I'm an 'accidental landlord' having bought a small flat in London with my wife (then girlfriend) before then moving to Bristol. We bought the flat in 2013 and lived there for 2.5 years before then renting it out for the last 2.5 years. We are planning on selling it when the current tenants move out next February.

My understanding: When we sell, (assuming £60k value appreciation) we each have to pay capital gains tax at 40% on our half (£30k) but we can deduct our capital gains allowance (£10k) and then any additional exemptions. Currently that's the last 18 months and some percentage for the fact we used to live there. I don't fully understand how to calculate those deductions but lets assume they total another £10k each. That means we actually pay 40% tax on £10k = £4k tax bill each.

My question: Apart from wondering if my understand above is correct, my question is whether the proposed changes would only affect the amount I can deduct, over and above my annual allowance and any relief i am due for any time I have actually lived in the property? So this wouldn't affect anyone still living in their property at the time of sale, but might affect situations of inheritance or divorce where the house is not lived in by the owners for more than 9 months, rather than the previous 18 month allowance.

Have I missed anything? 9 months seems generous enough in order to put a house on the market and sell it, no?

PinkDalek are you against these changes? Apart from the obvious negative financial impact on people with lots of houses (and presumably this wouldn't affect landlords who buy through a limited company or would it?) I'd be interested to understand the original intent behind the allowances and if you thought they were fair?

Cheers,
RossP

[PinkDalek]

My understanding: When we sell, (assuming £60k value appreciation) we each have to pay capital gains tax at 40% on our half (£30k) but we can deduct our capital gains allowance (£10k) and then any additional exemptions. Currently that's the last 18 months and some percentage for the fact we used to live there. I don't fully understand how to calculate those deductions but lets assume they total another £10k each. That means we actually pay 40% tax on £10k = £4k tax bill each.

The applicable CGT rate is no longer 40%.

For residential property gains the rate is normally 18% or 28% or both and The basic rate of CGT for residential property disposals is 18%. The 28% rate of CGT applies to individuals who are higher rate income tax payers, or whose gains exceed the unused part of their basic rate tax band. Further information can be found here: https://www.gov.uk/capital-gains-tax/rates

Both those extracts taken from https://assets.publishing.service.gov.u ... cument.pdf (which may be out of date by now but covers other changes that were due to be made on another Consultation).

The CGT Annual Exempt amount for 2019-20 for individuals is now £12,000.

My question: Apart from wondering if my understand above is correct, my question is whether the proposed changes would only affect the amount I can deduct, over and above my annual allowance and any relief i am due for any time I have actually lived in the property? So this wouldn't affect anyone still living in their property at the time of sale, but might affect situations of inheritance or divorce where the house is not lived in by the owners for more than 9 months, rather than the previous 18 month allowance.

Have I missed anything? 9 months seems generous enough in order to put a house on the market and sell it, no?

I think the proposals should not change the basic CGT computation which arrives at your rough gross gain of £60,000 (that before incidental costs of disposal) .

What is set to change, subject to the Consultation and enactment, is the final period exemption you've seen and lettings relief (there's an existing technical issue in that the two should not overlap/be double counted).

I haven't looked deep enough into the proposed changes to lettings relief nor how they would be applied but see chapter 4 includes The reform to lettings relief announced at Budget 2018 will limit the availability of lettings relief and restrict it to those who share occupation of their house with a tenant for all disposals made on or after 6 April 2020 which suggests in your case there'd be no Lettings Relief at all on a post 5 April 2020 disposal.

Clearly if you manage to exchange an unconditional contract (other than say vacant possession to be obtained in February 2020) prior to 6 April 2020 any changes shouldn't impact upon you. Presumably there's nothing to stop you marketing later this year.

Currently and very roughly, as it presently stands you'll have owned the flat for about 6 (?) years and you should get as a minimum Main Residence Exemption on about 40% of that (this ignoring the final period exemption for ease) which would be £24,000.

Using the wording in the link above but amending:

That part of the gain attributable to the letting and not qualifying for PRR is £36,000.

... lettings relief is due on the lesser of:

The amount of PRR (£24,000), or
£40,000, or
The gain attributable to the letting (£36,000),

the amount of lettings relief due is £24,000

The £60,000 gross gain is therefore reduced by 2 x £24,000 = Chargeable £12,000 - which should be easily covered by the two Annual Exemptions as applicable.

That's all very rough and ready and perhaps you should study this in greater detail (noting it is for 2018-19):

https://www.gov.uk/government/publicati ... elief-2019

PinkDalek are you against these changes?

I'll pass on that, if you don't mind, as I try and keep to Practical Issues but I imagine the Consultation I originally linked to goes into further background.


E&OE

[PinkDalek]

Have I missed anything?

I'm unsure if you saw my reply to your post in April!

In any event, the Policy Paper, Draft legislation and Explanatory note were published on 11 July 2019 and they are available here:

Changes to ancillary reliefs in Capital Gains Tax Private Residence Relief
https://www.gov.uk/government/publicati ... nce-relief

If Finance Bill 2019-20 is enacted in March 2020, as Finance Act 2020, then I believe those measures would take effect for disposals or deaths occurring on or after 6 April 2020.

If anyone is interested in reading the summary of responses to the consultation document, it should be here:

Capital Gains Tax: Private Residence Relief: summary of responses to the consultation on changes to the ancillary reliefs
https://assets.publishing.service.gov.u ... ponses.pdf

[TedSwippet]

If anyone is interested in reading the summary of responses to the consultation document, it should be here...

It's a less-than-riveting read, but it does nicely exemplify the government's approach to "consultation", which I find can generally be summed up as: ignore responses and press on regardless. For example:

Question 1: Do you have any comments about the reduction of the final period exemption?
2.2 Of the respondents who answered this question, the majority thought that reducing the final period exemption to 9 months was too short. ...
...
2.14 The government will therefore legislate to reduce the final period exemption to 9 months from April 2020.

Question: 2 Do you have any comments about the reform of lettings relief?
2.16 The majority of respondents opposed the reform of lettings relief. Some felt that removing accrued lettings relief after 2020 was unfair and that the new rules should only be applied to periods of lettings made after April 2020. Others thought lettings relief should be kept but reduced to £20,000, or suggested that a time period such as two years, rather than a value, should be ascribed to a period of letting.
...
2.30 The government will therefore legislate to reform the availability of lettings relief to those who share occupation of their house with a tenant for all disposals made on or after 6 April 2020.

[PinkDalek]

It's a less-than-riveting read, but it does nicely exemplify the government's approach to "consultation", which I find can generally be summed up as: ignore responses and press on regardless. For example: ...

Indeed and that's why, when posting, I hadn't bothered to read the thing.

The ICAEW Tax Faculty has made a few comments, which should be here:

April 2020 changes to private residence relief
https://ion.icaew.com/taxfaculty/b/webl ... -665379789

Extract only re the final period exemption and the lettings relief restriction:

Both of these changes will apply to disposals on or after 6 April 2020. ICAEW had responded to the consultation as ICAEW Rep 52/19, pointing out that these changes were retroactive. In the consultation outcome, the government justified its approach by stating that adding other rules, such as valuing the property at the point is marketed or retaining previous eligibility for lettings relief would add significant complexity. In terms of lettings relief, the consultation outcome suggests that taxpayers could rearrange their affairs under the current rules before 6 April 2020 to trigger the relief.

[Cookie]

Worse off, but to put them now into Ltd, have to pay increased stamp duty (3%?), which likely wipe out any benefit

[RossP]

Thanks for the Update. I am proceeding with the Sale in September and have also set up a limited company so that any property purchases I make with the proceeds will be down via that route.
RossP