Private Residence Relief – The ’36 Month Rule’ Is To Become The ‘18 Month Rule’!

If you bought the house in January 2004, and lived in it until the end of December 2008, and then moved out and lived elsewhere until you sold the house in December 2013, eight of the ten years of ownership would benefit from the CGT exemption: the first five years because you actually lived there, and the last three years because that is what the rules say. If the property was let after you moved out, there is a further exemption of up to £40,000 on the gain from the period of letting.

This exemption for the final period of ownership has been much exploited for tax planning, by nominating a property as your main residence for a short period (say, a month), and thus getting exemption for the final three years of ownership whilst retaining nearly all the exemption on your other main residence.  

This practice became known as ‘flipping’ a property, and was very popular with members of parliament before the expenses scandal. It was probably inevitable that something would be done to curtail it.

It has been announced that for disposals of property after 5 April 2014, the 36 month final period exemption will be shortened to 18 months. The date of disposal for CGT purposes is the date contracts are exchanged, but if contracts are exchanged before 6 April 2014, the 36 month exemption will only apply if completion takes place before 6 April 2015.

There is a curious exception to the reduction of the exemption period for disabled persons or a ‘long term’ resident in a care home (or someone married to a resident of a care home). This is conditional on the person concerned not having another main residence to which CGT exemption could apply at the time. Oddly, ‘long term’ is defined as three months or more, so care home owners may see an upsurge in applications from those wishing to move in for, say, four months!

The 36 month exemption has been around for some time – since 1991, in fact. Before that, the period was two years, and before 1980 it was only one year. Both extensions to the period were prompted by economic crises – so presumably this shortening of the period means the current crisis is now over!

If you are intending to sell a property in the short to medium term and you were expecting to benefit from the full 36 month exemption, is there anything you can do? It may be possible to transfer the property into a trust before 6 April 2014, which will count as a disposal for CGT purposes, and will crystallise the 36 month exemption, but this is not a simple matter and you should take advice from a tax consultant on whether it will work for you, and exactly what to do.