Budget 2018 - changes in private residence reliefs
Phillip Hammond’s 2018 Budget statement now seems a long way off. At the time, headlines mostly dwelt on the headline grabbing increase in personal allowances and the question of whether or not the Budget marked an end to austerity. A lot of water has passed under that bridge over the last few months, and attention has now shifted to the larger aspects of Brexit withdrawal and parliamentary arithmetic, but the draft legislation from the Budget has continued to evolve and a particularly relevant section for the agricultural sector has now been published, in the form of changes to prevent landlords from exploiting main residence relief allowances.With effect from April 2020, the exemption for the final ownership period of a partly exempt property will reduce from 18 months to 9 months (until April 2014 the period has been 36 months and this continues to be the case for those that move into care or with a disability) There will also be a restriction in lettings relief which applied when a property was partially let and partially owner occupied during the period of ownership. Under the proposed changes, lettings relief will apply only where part of a property was let whilst the owner was in residence.
For example, if a couple has owned a house for 6 years, during 3 of which it was a main residence, and thereafter it stood empty whilst they tried to sell it, they would, before this change, have been able to claim relief on 36 months of actual residence and 18 months of deemed residence. This would give an exempt period of 54 months or 75% of the gain. If the gain were, say, £96,000 only £24,000 would therefore be chargeable and , if there were no other capital gains during the year, that gain would have been covered by the annual allowances of £12,000 each.
Under the new rules the exempt period would only be 45 months, so the exempt percentage reduces to 45/ 72 or 62.5%, leaving £36,000 chargeable. After allowances this leaves £12,000 chargeable which would be subject to CGT at 18% or 28% depending on the taxpayer's total income during the year.
There could be even worse news for some. Where a property has, at some stage, been a main residence but is then let, it has in the past been possible to claim “lettings relief” which would reduce the taxable gain by the lower of £40,000 or the amount of the private residence exemption. Both joint owners can claim the relief, so for a couple it can remove gains of as much as £80,000 from the CGT regime. Using the example above but with a gain of £300,000 and the property being let rather than standing empty, where the property is sold before 5 April 2020, letting relief would be available for the couple based on the lower of the private residence exemption of £225,000 (75% of £300,000) or £80,000 (2x£40,000).The letting relief would therefore completely cover the chargeable gain of, in this case, £75,000.
With effect from 5th April 2020 lettings relief will only apply where the owners are actually sharing occupation with a third party (e.g. where rooms or an annex are let whilst the owner remains in occupation). Applying the new rules to the second example, the chargeable gain becomes 37.5% of £300,000 or £112,500 and in the absence of any lettings relief this will give a gain £88,500 after annual allowance. Almost all this will be taxable at 28% giving rise to a liability of £24,780.
The value of these reliefs can be significant, particularly where a property has made an appreciable gain in a relatively short period of ownership and it is not difficult to see why these reliefs are now seen as a way of enabling private landlords to reduce their CGT liability, but it will now bring a new area of complexity to many property transactions outside the simple 'move out – move in on the same day' variety. However, in the agricultural world the changes could have an adverse effect where farm cottages are used for a number of purposes over their ownership including main residence, employee occupation and commercial letting or where there are inter family property exchanges – a fairly common and frequently complex situation.
There are periods where owners are deemed to occupy their property as a home and more attention will need to be paid to these to reduce taxable gains going forward. Ones of most relevance to the farming industry may be the deemed owner occupancy for any period of absence of up to three years (provided there are periods of actual occupancy before and after the period of absence) and periods while living in employer provided accommodation where there is the intention to move back into own property in the future. The second of these is extended to the self-employed where they are living in a property under a legal agreement for the purpose of their self-employment – a common requirement under an AHA tenancy.
The sale of property which includes holiday letting of annexes which form part of the main residence will become more complex and much will depend upon the physical construction of the building. Calculations will need to involve previous usage and planning/rating correspondence. It seems likely that farmhouse B & B lettings, on the other hand, should continue to enjoy the lettings relief since there will normally be an element of shared occupancy, and indeed the shelving of proposed changes to rent-a-room relief may also help in this circumstance from an Income Tax perspective.
Finally, it is important to remember that the changes in the CGT payment date for gains on residential property sales will take effect from April 2020 after which date CGT will become payable within 30 day of completion. In one final piece of good news (or perhaps recognition of an impossible situation) the Chancellor announced that reasonable estimates of values and apportionments can be applied in order to compute provisional gains before the payment date.