The intention of the changes is to narrow the scope of the relief in order to bring more homes within the CGT regime.
Main residence relief (or 'principal private residence relief') was first introduced in 1965 and has been a key feature of the CGT regime. The relief enables taxpayers to sell or give away their property without having to pay CGT where the property is the taxpayer's only or main residence.
In the 2018 Budget, the Chancellor set his sights on homeowners and the availability of main residence relief.
The current rules
As well as for the period of actual occupation of the property, main residence relief can also be claimed for the following:
- Periods of non-occupation of up to three years, including an initial period of up to 12 months for property construction/renovation before first occupation
- Periods of time spent working away (either in the UK or abroad)
- The final 18 months of ownership of any property that is or has been a person's main residence. The aim is to give a CGT free period for those who sell the property after leaving it (known as 'final period exemption')
- Periods where a person lets part or all of their main residence (known as 'lettings relief').
The new rules
The changes outlined in the Budget 2018 relate to:
- Final period exemption - lowering the final period exemption from 18 months to 9 months. The final period exemption will remain 36 months for those who move into care, or for disabled persons
- Lettings relief - reforming the availability of lettings relief so that it will only be available to those who share occupation with the tenant.
These changes will apply to sales or gifts of properties which are eligible for main residence relief from 6 April 2020.
HMRC have opened a consultation (open until 1 June 2019) on the proposed changes seeking views on how they will work in practice and on some technical aspects of the main residence relief rules.
Impact of the changes
The reduction of the final period exemption from 18 months to 9 months and the reforms to lettings relief are likely to mean more people will find themselves within the scope of CGT for sales or gifts of their main residence.
In the Treasury's impact assessment, it is estimated that the changes will bring in an additional £15 million in tax in 2019/20, rising to £150 million in 2023/24, amounting to £470 million over the next five years.
These proposals will impact individuals owning multiple properties, those letting out a former main residence or UK expats who still hold their former homes in the UK. Given that the changes have come at a time that the property market is slowing and the political landscape is increasingly uncertain, those likely to be adversely affected by these proposals should consider obtaining tax advice before the changes come into force.