The Chartered Institute of Taxation (CIOT) is asking the Government to consider delaying changes to capital gains tax rules in relation to home sales, to take account of the impact of COVID-19 on the property market.
The measure is included in the current Finance Bill, which begins its committee stage in the House of Commons on Thursday 4 June.
Private Residence Relief (PRR) enables most owner occupiers to sell their properties without being liable for capital gains tax on any rise in their property’s value since they bought it. Final period exemption means that, under the law currently in place, people do not pay capital gains tax on gains made in the final 18 months of ownership, even if it was not their main residence during that period. The Finance Bill aims to reduce that period (backdated to take effect from 6 April 2020) to the final nine months of ownership for most people (though the existing 36-month period for disabled persons or those in a care home is retained).
The CIOT is concerned that the evidence used by the Treasury for this reduction in the final period exemption arose before the current COVID-19 pandemic brought the property market to a near standstill. It suggested an average selling time of approximately four and a half months – this may no longer be realistic, as it is only recently that the Government has moved to re-open tentatively the property market, after a shutdown of nearly two months.
Marc Selby, Chair of CIOT’s Property Taxes Committee, said:
“We applaud the Government’s desire to better target a tax exemption – we think all reliefs should be regularly and consultatively reviewed - but is now really the right time to be making this change to this relief?
“We are concerned that the original assumption of an average time of four and a half months for selling a property is out of touch with the reality of the property market today because of the impact of COVID-19. We strongly suggest that the original evidence base needs review and that consideration should be given to delaying the squeeze in the final period exemption until the impact of COVID-19 on the property market is better understood.”
Research by property website Zoopla found 41 per cent of would-be home movers across Britain had stepped back from their property plans in light of market uncertainty, loss of income and lower confidence in their future finances, in a survey of 2,000 individuals between May 12 and 19. It is unclear how long the current public health situation will last or whether changes in economic conditions will cause large scale cancellations of sales. The CIOT says it is a significant possibility that the market will remain slow for some time, with houses taking much longer to sell than expected at the time of the consultation, leaving some sellers with an unexpected tax liability because it takes longer than nine months to sell.
Marc Selby added:
“Many homeowners who are trying to sell a former home may not be aware of the reduction to nine months. If this change goes ahead now, the new rules must be better communicated. Their introduction coincides with the new 30-day time limit running from the date of completion to report and pay capital gains tax. The reduction in the final period of ownership exemption from 18 months to nine months combined with a 30 day time limit for reporting and paying tax on residential property gains means that the realisation of a chargeable gain is much more likely, particularly as the property market revives, and there is now much less time to establish capital gains tax liability and pay the tax due.”
The CIOT is disappointed that there was consultation only on the details of this change after the decision in principle had already been announced. A more consultative and evidence-based approach to tax legislation was among the themes of the Better Budgets report by the CIOT, the Institute for Fiscal Studies and Institute for Government in 2017.
Notes for editors
1. Government advice during the ‘lockdown’ noted that putting a home onto the market may be more challenging than usual. Official advice stated: ‘The buying and selling process can continue during this period but you should be aware that the process is likely to take longer than normal.’ It added that people ‘should, where possible, delay moving to a new house while measures are in place to fight coronavirus’. However, the government has since amended the coronavirus (COVID-19) regulations on 13 May 2020 to make clear that people who wish to move home can do so. The new guidance says that: ‘People are free to move home, however the process of finding and moving into a new home is likely to be different, as those involved in the process will need to adapt practices and procedures to ensure that the risk of spread of coronavirus is reduced as far as possible.’
2. Zoopla statistics: Two-fifths of UK home movers put property plans on ice, FT, 27 May 2020
The stated intent for the reduction in the final period is to better target the exemption at owner occupiers with one main dwelling. In addition, the longer the exemption period, the more PRR can be accrued on two dwellings simultaneously. CIOT recognises that this period of ‘deemed residence’ has been deliberately used to shelter gains accruing on more than one residence from tax.
The final exemption period was originally introduced so that those trying to move house (particularly those moving to follow work) were not disadvantaged in a property slump when it is difficult to sell a former home before acquiring a new one. The original exemption period when CGT (and PRR) was introduced in FA 1965 was for 12 months. This was increased to 24 months in FA 1980 with a further increase to 36 months in FA 1991 before being reduced to 18 months for disposals after 5 April 2014 subject to the relief for disabled persons or care home residents (thirty-six months).
The exemption period when longer was used to shelter part of the gains on more than one property at a time; hence the importance of evidence in getting the right balance between that understandable concern by HMRC and protecting people moving to a new house who cannot sell in a hurry in difficult markets.
4. The Chartered Institute of Taxation (CIOT)
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.
The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.
The CIOT’s 19,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact: Hamant Verma, External Relations Officer, 0207 340 2702 HVerma@ciot.org.uk (Out of hours contact: George Crozier, 07740 477 374)More Articles by Chartered Institute of Taxation (CIOT) ...