Where a property has been an individual's only or main residence at any point during the period of ownership, Principal Private Residence (PPR) relief is given for the final 36 months of ownership irrespective of the use of the property at that point (the 'final period exemption'). This final period exemption will be reduced from 36 months to 18 months from 6 April 2014.
Who will be affected?
The Government is targeting individuals with multiple homes who utilise the final period exemption to secure relief on more than one property at a time, but the effect of the change is wider than this. The final period exemption is intended to give individuals a period of grace during which they can still benefit from relief for a short period after moving out, eg because they are having difficulties finding a buyer. The period allowed was originally 12 months. It was increased to 36 months in 1991 to reflect the difficult market conditions during the recession at that time. PPR relief is calculated on a time-apportionment basis, so the reduction in the final period exemption will restrict relief where the property has not been the individual's only or main residence for the final 36 months of ownership.
The Government has stated that certain protected groups will be exempt from the change in rules, but it is not yet clear who these groups are.
If only part of a gain on sale of a property is covered by PPR relief, but all or part of the remainder relates to periods when it was let, letting relief can apply to reduce the remaining chargeable gain. The amount of letting relief cannot exceed the amount of PPR relief, so in some cases the reduction in PPR relief will also restrict the letting relief.
The change will take effect for disposals from 6 April 2014.
The final period exemption has been under the spotlight for some time, so its reduction should not come as a complete surprise. Clearly it is important for individuals who are having difficulties selling their homes, but the 36 month period is arguably quite generous.
It is not yet known which groups will be protected from the change, but we would hope it would cover individuals who are having genuine difficulties selling their only home. There may also be transitional provisions.