In this blog piece, Capital Gains Tax in the context of Principal Private Residence (PPR) is explained within a specific hypothetical scenario for ‘Tim’, who is looking to sell his second property of which he has used as a passive income generator on the rental market, and the impact that his different options upon his Capital Gains Tax.
Tim bought his home on 1 October 1997 for £155,000 (including conveyancer’s fees, etc.). He kept and let
it since he moved into a new home on 1 May 2015. The current rental agreement is coming up for renewal
and he would like to take the opportunity to get rid of the house but if he does so before October 2020
there is an early redemption penalty on the mortgage of £5,000 to pay. He would like to know how his CGT
position would be affected by the delay given that he pays income tax at higher rate and the property’s
current value of £350,000 is unlikely to change in the next couple of years.
If Tim sells his property at the beginning of November 2020 as opposed to, say, at the beginning of July
2019 he’s likely to have to hand over £3,500 more as a result of waiting. This is due to a combination of
factors. The amount of Principle Private Residence relief (PPR) available because of the time when it was
his home has been diluted by the extension of the period of ownership resulting in a loss of £8,700 of
relief. However, the problem is exacerbated by the proposed changes to the relief when someone disposes
of a residence after the end of this tax year. The nature of the changes were announced in last year’s
Budget* but when they are applied to a specific situation their significance comes sharply into focus.
Tim will lose £6,600 of relief because the final period exemption now applies to 9 months instead of 18.
But the really big change in calculating the PPR is the loss of lettings relief. The gain on a disposal in July
would be eligible for £22,500 letting relief – enough to reduce the chargeable gain to nil. A disposal after
this year would get no letting relief because of the proposal that it would be available only for periods of
letting where the owner occupied the property with the tenant. So, the gain after PPR on the later disposal
would be about £38,000.
Assuming that the client’s annual exemption is available to put against the gain and he is still paying
income tax at 40% next year, the CGT payable will be about £7,300. Hence, even when the early
redemption penalty itself and the expected saving of income tax as a result of having to pay that penalty
(£1,250) are taken into account, the delay ‘til next year is still costly.
*HMRC are currently consulting of the proposed changes and an announcement on the final proposals are
expected after 1 June 2019.
This article was contributed by AF Tax Solutions, if you have any further questions for them don’t hesitate to get in touch.