Imminent Change to Capital Gains Tax (CGT) – Private Residence relief
From the very introduction of CGT in 1965, there has always been an exemption from a charge to this tax where someone sells their only or main residence: Principal Private Residence (PPR) relief. Moreover, there has also always been provision for that individual not to lose PPR relief even when they do not occupy the property as their only or main residence at the end of the period of ownership (the ‘final period allowance’). This was implemented to aid employee mobility, by ensuring a person is not penalised for moving out of their area in search of work.
The Chancellor’s Autumn Statement on 5th December 2013 heralded an unforeseen change to PPR relief, cutting the final period allowance from 36 to 18 months. The change includes limited exceptions.
The Law as it stands
“Relief on disposal of [a] private residence” is covered in ss.222 – 225 Taxation of Chargeable Gains Act 1992 (TCGA).
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S.222 TGCA introduces PPR relief:
“(1) This section applies to a gain accruing to an individual so far as attributable to the disposal of, or of an interest in – (a) a dwelling-house or part of a dwelling-house which is, or has at any time in his period of ownership been, his only or main residence…”
And s.223 introduces the amount of the relief, including the final period allowance:
“(1) No part of a gain to which s.222 applies shall be a chargeable gain if the dwelling-house or part of a dwelling-house has been the individual’s only or main residence throughout the period of ownership, or throughout the period of ownership except for all or any part of the last 36 months of that period.”
Originally, this final period allowance under s.223 was 12 months, increasing to 24 months in 1980 and finally 36 months under the Finance Act 1991. The increases were introduced to ensure that individuals who were having difficulty selling a property were not disadvantaged, especially relevant at times when there has been a slump in the property market. Such a slump has often coincided with times of high unemployment, when more people may be moving around the country to find work. The final period allowance has, however, been used over the years by an increasing number of people, in an increasing number of situations. It got a particularly bad press after MPs were found to be ‘flipping’ homes to maximise the potential of this relief.
The change being implemented
The final period allowance is to be reduced, in most cases, from 36 to 18 months, but the Finance Bill introduces a two-tier relief: provision is made for the period to continue to be 36 months where the disposal is made by a disabled person or a person in a care home.
The Bill first deals with the minimal changes necessary to s.223 to implement the default final period allowance of 18 months. It then introduces a new section – s. 225(E) – to create the exception for which the 36 month final period allowance continues to apply.
Disposals by persons in care homes
The new s.225E continuation of the 36 month relief will apply where:
“(a) the individual is a disabled person or a long-term resident in a care home, and
(b) the individual does not have any other relevant right in relation to a private residence”
It will equally apply where the individual’s spouse or civil partner meets those conditions, or to the trustees of a settlement under which the individual or their spouse or civil partner has an entitlement to occupy a property as their only or main residence.
An individual is defined as a ‘long-term resident’ in a care home at the time of the disposal if at the time he/she is resident there, and has been resident there, or can reasonably be expected to be resident there, for at least three months. For these purposes, a care home means, “an establishment that provides accommodation together with nursing or personal care.”
Potential difficulties in obtaining the s.225E extended final period allowance
Long term residence in a care home
The exception provided by this section is very valuable for elderly clients, in so far as it goes. But it clearly will not cover elderly clients who, for example, move into sheltered accommodation or move in with relatives. The long term consequence of such a move – the sale of the only or main residence they used to call their home – will equally apply, but unless the individual is specifically a long-term resident of a care home within the ambit of the new section, they will only enjoy the final period allowance of 18 months instead of 36 months.
No interest in another property
Another area of difficulty surrounds the requirement that the individual, or their spouse or civil partner, “does not have any other relevant right in relation to a private residence”. The meaning of this requirement is set out in s.225E(6): it will apply if the individual “owns or holds an interest in a dwelling-house or part of a dwelling-house other than that in relation to which the gain accrued”. It equally applies where the trustees of a settlement own or hold such an interest, and the individual is entitled to occupy the property under the terms of the settlement.
This requirement that an individual does not have an interest in any other property will prevent the longer final period allowance applying in a wide variety of circumstances. It will ring alarm bells for many practitioners, whose elderly clients might well have an interest in more than one property, even if not a full-blown property portfolio. The owner of a second (holiday) home, or of a single long-term tenanted property could easily be caught out: moving into a care home will not be sufficient to allow them the longer 36 month grace period for which PPR relief might otherwise apply.
An additional factor to consider arguably arose very recently when the Chancellor included in his Budget an overhaul of pension provisions, permitting pension-holders to release all their funds rather than being obliged to buy an annuity with the bulk of them. There has been significant press response suggesting that pensioners might choose to launch themselves into the buy-to-let market with their released funds, finding a different way to generate income in their retirement. Most will have no idea that this would mean they are relinquishing the enhanced final period allowance on their main residence, just at a time when the possibility of having to go into a care home is becoming more significant.
HMRC states the policy objective of the reduction of the final period to which this relief will apply to 18 months makes, “…the tax system fairer by reducing the incentive for those with more than one property to exploit the rules while still providing people with sufficient time to sell a previous residence after moving to a new one.” But is this what the new provisions will do?
Elderly clients who are becoming infirm can choose many and varied ways to accommodate their increasing frailty. Only choosing to live in a care home long term will enable them to take advantage of full PPR relief for the last 36 months for which they own their previously main residence. And even that will be of no help if they have an interest in any other property.
Concerns have also been raised that halving of the final period allowance could be detrimental in many cases of separating and divorcing couples: it is easy to envisage circumstances in which an individual will have moved out of a property more than 18 months before arrangements are finalised for the separating couple and the property is sold.
There is no doubt that the reduction of the final period allowance in relation to a claim for PPR relief will have an impact wider than simply catching those trying to ‘exploit the rules’.
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