What you need to know: tax changes for property owners
An overhaul of capital gains tax (CGT), halving the final period exemption and restrictions on lettings relief, not to mention possible changes to inter-spousal transfers, will have ramifications for anyone selling or renting property
There is no doubt that the ‘only or main residence’ relief is under attack from a number of directions by HMRC after the proposed changes due to take effect from April 2020.
Indeed, even recent tribunal decisions have seemed to crack down on matters requiring not only an element of permanence, but also a proven ‘quality’ of occupation if the relief is to apply.
Loss of lettings relief
As from 6 April 2020, lettings relief will be restricted to property owners who are in shared occupancy with their tenant.
Lettings relief was introduced in 1980 to allow people to let out spare rooms in their property on a casual basis without losing the benefit of principal private residence (PPR) relief.
In practice, however, it has been used for purposes beyond the original policy intention, benefitting those who let out a whole dwelling that has been their main residence at some point.
The reform means that lettings relief will no longer be available for periods where a property owner has moved out of the property and lets it to tenants, effectively abolishing it for buy-to-let purposes.
The impact on a typical landlord will be to increase the chargeable gain on disposal by up to £40,000. Where this is a married couple, this will be up to £80,000.
Final period exemption
In addition to the above changes to lettings relief, the final period exemption is set to change from 2020/21 onwards from 18 months to nine months.
This exemption was first introduced during a property market slump as a concession for people who were unable to sell their former home after moving to another. The effect of this was to exempt the final 36 months of ownership that had been the person’s main residence, giving them enough time to sell their house after leaving it.
In Finance Bill 2014, it was then reduced to the current exemption period of 18 months, although there are special rules to allow disabled homeowners and those who go into residential care to claim the full 36 months’ relief and these will not change in the current reforms.
There would be those who argue that with all the Brexit transition uncertainty, there could well be another property market decline. If this is the case, this reduction to the final period exemption could be poorly timed and indeed defeats the very point of why such an exemption was introduced in the first place.
The government is also considering changing the rules on inter-spouse transfers, so that the receiving spouse always inherits the transferring spouse’s period of ownership and the use to which the property was put during that time.
At present, the receiving spouse only inherits the transferring spouse’s prior use of the property if it is the couple’s only or main residence at the time of the transfer.
The aim of such a reform is to level the playing field. So, for example, a person claiming full PPR on the disposal of a house that their spouse had previously owned and let out before the transfer could not make a claim, but if a property was transferred after a period of use as a main residence, a claim could be made even if the receiving spouse has never used it as such.
‘Quality’ of occupation
We are all aware of the exemption from capital gains tax (CGT) for only or main residences in s222, Taxation of Chargeable Gains Act 1992 (TCGA 1992), and with the requirement that such a residence has a degree of ‘permanence’ and ‘continuity’.
The concepts of permanence and continuity originate from a judgment handed down the Court of Appeal in the late 1990s – Goodwin v Curtis  STC 475.
This case always features in HMRC’s decisions and skeleton arguments in the tax tribunals, including Hezi Yechiel v HMRC  (TC06829). Here the First Tier Tribunal (FTT) considered the principles derived from case law and appears to have introduced a new concept related to ‘quality’ of residence.
The taxpayer initially bought the house with the intention of it being a marital home after some renovations. However, after his marriage broke down, Mr Yechiel moved into the property, although he was unsure of his plans for the future.
However, while he physically slept and ate takeaway food there, he neither cooked nor did his laundry in the property and did not have a dining table or chair.
The tribunal therefore held that the ‘quality’ of occupation was diminished given significant periods of ‘living’, including cooking, eating a meal sitting down and spending periods of leisure, were spent at his parents.
Many would question what effect this tribunal’s approach might have in an age when people spend more time away from their homes? We live in a time where it is not uncommon to live off takeaways or rely on our parents in moments of crisis. Should these factors really have tilted the balance against a finding of occupation as a residence?
The new CGT tax return
Alongside the proposed changes to lettings relief and the final period exemption, from 6 April 2020 the new CGT tax returns are introduced for to the disposal of ‘non-exempt property’.
With so many attacks on PPR a lot of residences that have once been the main residence will now fall into the CGT regime in part.
Under the new rules, it is understood that any CGT incurred following the sale of a residential property will have to be reported on a CGT return and the tax paid within 30 days of the completion date.
Main residences will have to be included where the tax relief is not fully available, thus hitting those already suffering from the loss of lettings relief or reduction in the final period exemption even harder.
It will also be important to consider not just the new CGT reform but also the way it impacts on ‘non-exempt property’ even if that ‘non-exempt’ element is only for part of the period of ownership.
There is an assumption by a lot of taxpayers that if they lived there as their main residence for some of the time PPR must still apply and so there must be no reporting requirement to HMRC.
It is therefore the responsibility of the conveyancing lawyers and any other professional advisers to remind their clients of these changes and to consider the outcome of recent case law to see how this may impact them.