HMRC proposal to restrict tax relief on the sale of main residencies


Max Chassels

Max Chassels

Tax Director


On Monday 1 April HMRC launched a consultation regrading two changes to Private Residence Relief (PRR) which were announced in the 2018 Budget. PRR applies to the sale of a property which has been the owner’s only, or main, residence at some point during the ownership period. 

The proposed changes relate to:

  • restricting the final period exemption from 18 months to 9 months;  
  • reforming the availability of lettings relief. 

This comes after HMRC restricted the final period exemption from 36 months to 18 months on 6 April 2014.

Both new rules will apply to sales of properties which are eligible for PRR from 6 April 2020.

Restriction of the final period exemption

The restriction in the final period exemption from 18 months to 9 months means that if you move out of your main residence before you sell it, only the last 9 months of the ownership period where the property is not your main residence is exempt from Capital Gains Tax (CGT). 

For example, you purchased your main residence for £100,000 in January 2011, moved out in January 2018 and sold it for £150,000 in January 2021. The £35,000 pro-rata gain between January 2011 and January 2018 would be exempt from CGT. However, only 9 months of the final three-year period would be exempt, i.e. £3,750 would be exempt and £11,250 would be taxable. 

This proposed change is likely to impact individuals who have acquired and moved into a new property but are still trying to sell their former property in a “sticky” market.

Lettings relief reform

Lettings relief will be restricted to owners who share occupancy with a tenant, i.e. rent their spare room to a tenant and still reside in the property. This means that lettings relief will not be available for periods where an owner has moved out of the property and therefore no longer shares occupation with a tenant or tenants.  

This is most likely to impact individuals who acquire a flat as their first property and then retain that flat when they buy a house jointly with their partner, with what was their main residence effectively becoming a buy-to-let property. It should be noted that the proposed changes to lettings relief will not impact the reliefs available to individuals who move from, and return to, their main residence due to working arrangements and rent the property during this period of absence.

What are the potential additional tax liabilities which could arise because of the proposed changes?

The impact of restriction of the final period exemption from 18 months to 9 months will ultimately depend on the size of the capital gain and the period of ownership. For many individuals it is likely that any capital gain arising due to this change will be covered by their tax-free annual exemption (assuming no other sales) which will be £12,000 in the 2019/20 tax year. If the property is jointly-owned, then each owner would have an annual exemption available to set against their share of the gain.  

For a higher rate taxpayer any gain would be subject to CGT at the residential property rate, which is currently 28%.

Currently, lettings relief can provide relief on up to £40,000 of gains arising on the sale of a main residence. Where properties are jointly owned (for example by spouses or civil partners), lettings relief is available to each owner on their share of the gain and up to £80,000 of the gain can be exempt. Without lettings relief, the additional CGT liability for higher rate taxpayers that jointly own a property could be up to £22,400.

Get in touch

Both of these rules will not come into effect until 6 April 2020, however if you think these changes might have an impact on your long-term plans, please get in touch with me to discuss the best way forward.