Important tax changes for home owners from next April

QUESTION: I’m in the process of selling our family home and down sizing to a smaller property. I have just completed the purchase of our new home and we intend to move in soon. Our current home has been on the market for six months but we haven’t been able to sell it yet. With Brexit uncertainty it may take another 6 to 12 months to sell our home. Are there any tax implications for me from the potential delayed sale of the property?

ANSWER: Important changes are planned to come into force in April 2020 which relate to tax relief that is due on the sale of property which was a taxpayer’s Principle Private Residence (PPR) during any point in the period of its ownership.

While PPR might be a relief that is often taken for granted, it affects the most substantial asset many people will ever own – your home.

The final exemption period allows individuals a period of grace to sell your home after they have moved out. While it is more usual to sell one property before buying another, sometimes individuals are forced by personal circumstances to move out before they can sell their previous home.

Under the provisions of the final exemption period, as long as the property has been their main residence at some point during their ownership, the individual is deemed to be in occupation for the final months (18 months) regardless of whether or not they actually were in occupation.

From the government’s perspective, some individuals with multiple residences have been taking advantage of how this relief is structured by transferring main residence elections between properties in a practice known as flipping. The changes are intended to “to better target the exemption at owner-occupiers” by reducing the benefits of flipping. The period of nine months is justified as being in excess of evidence that the Government has received suggesting that properties take an average of 19 weeks to sell.

Concerns have also been raised about the 19-week average sale time figure used as justification for the change. The basis of the statistic is unknown, and an average hides the effect of a number of variables which may affect the time to sell, such as location, time of year, price bracket etc.

In practice however, number crunching suggests that property gains will generally have to be fairly substantial to trigger significant amounts of tax when PPR is otherwise available for the rest of the ownership period.

This means that for many home owners who struggle to sell, the main issue may not be the actual quantum of any additional tax generated by the measure, but the new requirement to report and pay within 30 days of completion if any tax does arise.

These new reporting rules for residential properties have already been legislated and will also come into effect from next April for UK residents. (Non-UK residents disposing of UK residential property have been required to report their disposals within 30 days since April 2015.)

The government also intends to restrict letting relief to situations where both the home owner and their tenant are occupying the dwelling at the same time.

No transitional measures are proposed and this measure has quite a severe cliff-edge effect, since it effectively removes letting relief retrospectively for those whose past lettings do not meet the new conditions. For a higher-rate taxpayer who was expecting to benefit from the maximum potential relief on up to £40,000 of gains, this measure will cost them an extra £11,200 in tax overnight.

In addition to the requirement that the home owner is in residence with their tenant, the letting must also be “otherwise than in the course of a trade or business”.

This makes the scope of the new letting relief unclear and could give rise to some potentially difficult questions of fact – since providing definitive guidance as to when a trade or business exists could be challenging.