Draft legislation to be included in the next Finance Bill will make important changes to the calculation of CGT private residence relief. As announced in the Autumn 2018 Budget, there will be a reduction in the final period exemption to just 9 months and stricter conditions for letting relief to apply.
Currently where a property has been the taxpayer’s main residence, the last 18 months of ownership counts as a period of deemed occupation. This will be reduced to just 9 months for disposals on or after 6 April 2020. It is understood that this is being introduced to counteract “second home flipping” allegedly used by MPs when they sell their London residences.
Although the OTS were tasked with simplifying inheritance tax, they also considered the interaction with CGT as many asset transfers potentially have both CGT and IHT implications. Currently there is no CGT on assets transferred on death and the recipient inherits the asset at its market value at the date of death.
It has been suggested that the CGT uplift on death distorts decision making relating to assets that benefit from an exemption from Inheritance Tax. Where an individual holds such an asset that has risen in value, and is considering transferring it during their life, they are often advised to retain it until death rather than giving it away during lifetime, because of the tax benefits.
Where a business is retained until death, any potential capital gains are wiped out and there is no Inheritance Tax to pay. This could lead to an asset being retained rather than being transferred to the next generation at the time that is right for the business.
We will again monitor the progress of this proposed change as it is likely to have significant implications on family business succession planning.
If you would like any further help or advice on the above please call Richard Grayson on 01522 815100.
Currently letting relief provides up to a £40,000 deduction in computing the capital gain on the disposal of a property that was at some time the taxpayer’s main residence. The relief is the lesser of £40,000, the gain attributable to the let period, and the amount of private residence relief. For a couple this could potentially exempt up to £80,000 of the gain from CGT.
The draft legislation will limit letting relief to those situations where the owner remains in shared occupancy with the tenant, i.e. has lodgers living in the house.
If you were hoping to take advantage of letting relief on the sale of a property, you might want to consider disposing of the property before 6 April 2020 to take advantage of the current rules. Contact us for advice in this area as we can estimate the additional tax that might be due following the withdrawal of this generous relief.