Tax experts issue concerns about changes to private residence relief

The Chartered Institute of Taxation (CIOT) is calling for the aims and use of private residence relief to be reviewed in terms of how it affects the proceeds of the sale of homes.

It says that the HMRC should look at its role closely ahead of planned cuts to the final exemption period and it is concerned that the new rules take into account regional market variations and home owners personal circumstances.

Private residence relief (PRR) is a relief from capital gains tax when someone sells their home. The relief ensures that the proceeds of sale of the home are not reduced by a capital gains tax charge.

One aspect of the relief is that provided the property has qualified for PRR at some point during ownership, the last 18 months, known as the final exemption period, almost always qualifies for relief, even if the owner has moved out, to allow for delays in selling.

The CIOT has responded to a recent HMRC consultation which proposes to restrict the availability of PRR for home owners by cutting the final exemption period from 18 months to nine months from April 2020. The objective is to tackle a perceived exploitation of the rules where individuals with more than one home can receive a final exemption period on both properties.

CIOT’s suggestion of a review echoes an Office of Tax Simplification (OTS) recommendation in 2011 that the conditions for PRR should be reviewed to test which are still appropriate and whether any can be streamlined and rewritten in a simpler format.

‘If HMRC have serious concerns about abuse of the PRR, they could consider conducting a broader consultation about the objectives and effectiveness of the relief,’ said Aparna Nathan, chair of CIOT’s CGT and Investment Income Sub-committee.

‘It is important for HMRC to provide the evidence base that has been used to evaluate whether nine months is sufficient time for those who are genuinely trying to sell to move house particularly as there are likely to be large regional variations and differences depending on property values,’ he pointed out.

‘We are concerned that these changes indicate a trend towards repeatedly whittling away this important but admittedly costly relief. Regrettably, a simple relief has become overcomplicated, with scope for taxpayers to go wrong. It is unfortunate that in situations other than the most straightforward, home owners need professional help to determine the availability of the relief and/ or the extent of their liability,’ he explained.

CIOT also says that any new rules that are enacted must be straightforward and well communicated. ‘There is a concern that many home owners may have a liability because they are unaware that the final period exemption was reduced from 36 months to18 months from 06 April 2014. Better communication is vital given the separate new requirement from April 2020 to report the disposal and pay any capital gains tax within 30 days of completion,’ said Nathan.

‘Given the policy intent more closely to target PRR at owner occupation, an alternative approach might be to link the final period exemption more closely to the period of owner occupation,’ he added.

He also pointed out that the changes to reliefs related to PRR are not expected to have any significant economic impacts for the Treasury, with expected savings of £150 million by 2023/2024. HMRC’s Estimated costs of principal tax reliefs document January 2019 shows that CGT exemption of gains arising on disposal of only or main residence is estimated to be £27 billion in 2018/2019.

‘There are some circumstances where nine months will not be enough time to sell the family home. In the case of no-fault divorce, where the property is to be sold, the time limits may prohibit a sale until a longer period than nine months has elapsed. Consideration should be given to whether an exception providing a longer final period exemption in these circumstances should be available,’ Nathan concluded.