Policy paper

Changes to ancillary reliefs in Capital Gains Tax Private Residence Relief

Published 11 July 2019

Who is likely to be affected

Individuals who own one or more residential properties that they have lived in as their main residence at any time.

General description of the measure

This measure makes a number of changes to Capital Gains Tax private residence relief (PRR) where individuals have more than one residence. It reduces final period exemption from 18 months to 9 months (there are no changes to the 36 months that are available to disabled persons or those in a care home) and reforms lettings relief so that it only applies in those circumstances where the owner of the property is in shared-occupancy with a tenant.

It also:

• makes some revisions to job related accommodation relief by extending it to those cases where a homeowner who is a serving member of the armed forces is in receipt of payments from the Ministry of Defence (MOD) under its Future Accommodation Model
• legislates 2 extra statutory concessions (ESC)
• clarifies the rules concerning the transfer of residential properties between spouses or civil partners

Policy objective

This measure aims to better target the ancillary reliefs within Capital Gains Tax PRR at owner occupiers

Background to the measure

These changes were announced at Budget 2018.

Detailed proposal

Operative date

The following changes apply to disposals, which normally take place when contracts for the sale of the property are exchanged, made on or after 6 April 2020:

• the changes to the final period exemption and lettings relief;
• the legislated ESC D49, for a short delay in owner occupiers taking up residence, after which date the ESC will be withdrawn
• the changes to the spouse and civil partner rules apply when the transfer between spouses or civil partners occurs on or after 6 April 2020, the existing rules continue to apply where the transfer between spouses or civil partners was made prior to 6 April 2020, even where the disposal by the recipient spouse or civil partner is made after that date

The legislated ESC D21, for late claims in dual residence cases, applies to nominations given on or after 6 April 2020, after which time the ESC will be withdrawn.

The change to job related accommodation provided to the armed forces will apply when the relevant regulations bring the Income Tax exemption into force.

Current law

The rules for private residence relief are found at sections 222 to 226A Taxation of Chargeable Gains Act 1992 (TCGA).

Sections 222 to 224 TCGA provide relief from Capital Gains Tax on gains accruing to an individual on the disposal of a property which has been their only or main private residence. These sections also provide relief where in certain defined cases an individual has been absent from their home.

Proposed revisions

Legislation will be introduced in Finance Bill 2019-20 amending sections 222 to 224 TCGA. These changes will:

• reduce the final period exemption from 18 months to 9 months (there are no changes to the 36 months that are available to disabled persons or those in a care home)
• reform lettings relief so that it only applies in circumstances where the owner of the property is in shared-occupancy with a tenant
• make some revisions to job related accommodation relief by extending it to serving members of the armed forces, who are required to live away from home and, instead of being provided with job-related accommodation, receive payments from the MOD under its Future Accommodation Model and uses those funds to pay for accommodation
• legislate 2 ESC - D21 Late claims in dual residence cases and D49 Short delay in owner occupiers taking up residence
• clarify the rules concerning the transfer of residential properties between spouses or civil partners - those rules will make clear that where an individual transfers all or part of an interest in a residential property that they own to their spouse or civil partner, the receiving spouse or civil partner will inherit the transferring spouse’s or civil partner’s previous history of use of that property, resulting in a fairer outcome

Summary of impacts

Exchequer impact (£m)

2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024
-	+15	+50	+120	+135	+150

These figures are set out in Table 2.1 of Budget 2018 as ‘Private Residence Relief: reform lettings relief and final period exemption from 2020-21’ and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2018.

Economic impact

The measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

The reduction in the final period exemption will increase the Capital Gains Tax liability for those individuals who have 2 or more residences at the same time and they are disposing of one of those properties which, whilst it is no longer used as their main residence, has been used as such in the past and has accrued a period of private residence relief. In such cases the measure will reduce the period of relief that is available for the last period of ownership from 18 to 9 months (there are no changes to the 36 months that are available to disabled persons or those in a care home).

The abolition of lettings relief will impact on those individuals who have chosen to wholly let out a former main residence to tenants, as relief will now be restricted to those individuals who share occupancy with their tenants.

This measure will also benefit members of the armed forces who, as part their duties, are required to live away from their home and, instead of being provided with MOD accommodation, are in receipt of payments under the MOD’s Future Accommodation Model requiring them to find their own accommodation.

The measure also puts on to a statutory basis 2 ESC. One ESC benefits those individuals who have more than one residence, one of which they own and the other (or others) they rent and has a negligible capital value and they did not realise that by doing so a nomination as to the main residence was required. The other ESC benefits those individuals who cannot immediately move into what will become their main residence because it is being built or redecorated.

In addition, the measure will also make fairer the process for those individuals who chose to transfer all or part of an interest in a residential property that they own to their spouse or civil partner. It will ensure that the receiving spouse will inherit the transferring spouse’s periods of use of that property resulting in a fairer outcome.

The measure is not expected to impact on family formation, stability or breakdown. Although any additional Capital Gains Tax liability could reduce the amount of household or family income available, the individuals affected by these changes are likely to be relatively well-off and own or occupy more than one property.

Equalities impacts

Our data confirms that this measure will impact men more than women, and those in older age groups. Apart from these groups it is not anticipated that there will impacts for those in groups with other protected characteristics.

Impact on business including civil society organisations

This measure is expected to have no impact on businesses or civil society organisations, as it only affects individuals.

Operational impact (£m) (HMRC or other)

There will be a negligible operational impact on HMRC.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected from tax returns.

Further advice

If you have any questions about this change, contact Nick Williams on telephone: 03000 585 660 or email: capitalgains.taxteam@hmrc.gov.uk.