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The clause reduces, in most cases, the period for which an only or main residence automatically qualifies for final period exemption from 36 months to 18 months. The exception to that is individuals who are disabled or in a care home and who have no other property on which they can claim private residence relief. They will continue to get the 36-month final period exemption.
The stated policy objective is to make the tax system fairer by
“reducing the incentive for those with more than one property to exploit the rules while still providing people with sufficient time to sell a previous residence after moving to a new one.”
This measure would increase the capital gains tax liability for an individual who has two or more private residences at the same time for more than 18 months. Those affected by this change are likely to be wealthy individuals with more than one property.
We understand the thinking behind the clause and, of course, we do not want people to be able to effectively play the system and avoid paying capital gains tax artificially. We therefore support the thrust of the measures contained in the clause, but I seek clarification from the Minister on a number of points. He will be aware that the OTS, in its final report, said in relation to principal private residence:
“This relief is clearly of considerable importance and is itself a simplification on the basis that it keeps many taxpayers outside the CGT net. However, there has to be scope for simplification due to the numerous conditions and sub-reliefs causing complexity in anything other than straightforward cases. It is therefore proposed that these conditions be reviewed to test which are still appropriate, researched to see whether any can be streamlined and rewritten in a simpler format.”
I would be grateful for the Minister’s comments on the view taken by the OTS. After the clause is agreed today, does he intend to take on board some of what the OTS said, and if so, what is his proposed timetable for doing so?
I should be grateful if the Minister would set out the evidence base used to establish that 18 months is sufficient time for those who are genuinely trying to move home. I am concerned that there might be large regional variations in how long it takes people to sell their home. The expectation would be that sales take place in a shorter period of time in London and the south-east, where the housing market is much more buoyant, but 18 months might not be sufficient to sell in areas where it is less buoyant. What assessment has he made of those regional variations?
Some commentators have raised concerns about the definitions contained in the clause and, in particular, that the relaxation to 36 months only applies where a person is disabled or is a long-term resident in a care home at the date of disposal of the property. They fear that the “long-term resident in a care home” criterion is too restrictive. The low incomes tax reform group has suggested that instead of the current definition catching people who are long-term resident in a care home, it might be extended to include a long-term resident in a care home, respite accommodation, sheltered or very sheltered accommodation or those who, for reasons of old age or disability, choose to sell their homes and live with family or friends. The group makes the reasonable point that older or more vulnerable people do not often move into a care home straight away, but end up spending time in hospital, with family, in sheltered accommodation or short-term respite care first. It also suggests extending the definition of a disabled person to not only those in receipt of the relevant benefits, but those who might be eligible to receive them, as well as those who are suffering from a long-term chronic illness.
I understand the difficulties in capturing all those whom the exclusion to the new 18-month rule is intended to catch while still keeping the system simple, and I bear in mind the OTS’s comments that I quoted earlier, but will the Minister set out his views on the definitions that have been adopted by the legislation? Why has he rejected the wider definitions suggested by the low incomes tax reform group? Will he keep those matters under review as clause 54 beds in?
The Association of Taxation Technicians raised concerns about those who are moving to take up a new job and may lose out as a result of the proposed changes. It points out that people will often initially move into rental accommodation, perhaps to cover a probationary period until permanent appointment in their new job is confirmed. They may retain their former main residence as the only house that they own, so there is no question of their trying to exploit the rules and artificially avoid paying capital gains tax. They may only find a buyer and complete the sale of their house more than 18 months after they moved into rental accommodation. It does not seem the legislation’s intention that someone in those circumstances would be liable to capital gains tax. What should happen in those cases? Is the Minister concerned that there is a danger that the approach to counter unacceptable exploitation of the current laws might have been imprecisely targeted?
Clause 54 provides that where an individual owns a property that has at any time been their main home in the last 18 months, they will automatically qualify for relief from capital gains tax. That is reduced from the current position where the last three years qualify. Currently, if a person lives in a property as their principal private residence, no capital gains tax is due for that period or for certain allowed periods of non-residence. One of those allowed periods is the last three years of ownership, which is known as the final period. That was intended to deal with the scenario where an individual moves to a new house before the old one is sold and to give them time to sell it before capital gains tax starts to be due on it. However, some people are using the final period in a way that was never intended and getting up to three years’ relief on a property that they are not living in.
I fully support the clause. I see it as a way of freeing up some housing stock that may otherwise be empty. Anecdotally, I have heard that affluent people that can afford to have two houses are keeping the first one right up to the end of that period to maximise the capital gain. Quite often that property is not let so it is left empty. Was that a driving force behind the clause?
My hon. Friend makes an interesting and important point. That may be one of the consequences of the clause, but I would not necessarily say it was the driving force behind it. It will certainly be interesting to see what the consequences will be. Whether it will help to free up housing capacity is a point that should not be dismissed, so I am grateful for his observation.
It is worth pointing out that the final period of relief was originally one year. It increased to two years in 1980 and to three years in 1991. It may be useful if I remind the Committee of what the then Member for Islington, South and Finsbury, Chris Smith, said in the 1991 Finance Bill Committee:
“In the current very flat housing market, the period of two years may be inadequate…Although that relief is not unreasonable where the house is left vacant during that period, especially when it is not appreciating much in value, relief becomes rather generous where the house is let before it is sold so that rental income will accrue as a result of the house being unoccupied by the owner or it is left deliberately vacant during a housing boom so that a much greater gain can be realised at a later date”.—[Official Report, Standing Committee B, 13 June 1991; c. 311.]
That point is not dissimilar to the one made by my hon. Friend the Member for Rochford and Southend East a moment ago. The then Financial Secretary to the Treasury, my right hon. Friend the Minister for the Cabinet Office and Paymaster General, agreed with that observation then and we agree with it now. The housing market is very different now compared to 1991. The current evidence shows that on average UK properties do not stay on the market long before they sell.
People have changed their behaviour to use the relief in ways that were not intended to be covered. Some people have taken unfair advantage of the final period by flipping their property to get relief on second homes—“flipping” is where a property owner buys a second home and nominates it as their private residence for a short time, with the express intention of securing private residence relief on it before they flip the nomination back to the first property. If they sell their second home within three years, none of the capital gain they make on the sale of the second investment property will be chargeable to tax. They also get near full relief on their main home and often full relief after deduction of a person’s annual exempt amount.
The Government support home ownership, but the three-year period is too generous and we are reducing it to 18 months. However, we recognise that not everyone will be aware when they leave their home that they may not be returning to it—such as when they go into hospital or respite care because of illness or injury. The decision to forgo the independence symbolised by living in one’s own home is not easy. The Government want to give people time to make that decision without fear of the possible capital gains tax consequences. The clause therefore maintains the final period of three years for people with disabilities and for anyone who is a long-term resident of a care home, when they sell their former home. The Government do not want to impact on anyone who is genuinely struggling to sell their home and we will keep this policy under review in the context of housing market trends.
Let me respond to the points made by the hon. Member for Birmingham, Ladywood, who asked why the Government have not sought to simplify private residence relief, as recommended by the Office of Tax Simplification. We continue to monitor the tax system and act when problems are identified. To be fair, the measure is not about reforming private residence relief as a whole. However, we wanted to act swiftly to address the worst abuses of the private residence relief. On the issue of whether 18 months is sufficient time for those who are genuinely trying to sell to move house, a wealth of data are publicly available on property market trends, including the time taken to sell. Officials looked at information on the average length of time to sell in a range of regions across the UK. They were informed by home.co.uk, the monthly national house price survey, and hometrack.co.uk. These indicate that people will be able to sell a property in the UK within 18 months. Those who cannot sell their home within 18 months are likely only to be liable for CGT on gains apportioned to a short period and the annual exempt amount may provide part or full relief on any gain on the property. Someone struggling to sell their home also has the option to rent it out. Lettings relief of up to a maximum of £40,000 may also be available to someone who lets out a property that is, or has been, their main residence.
In terms of the issues over where we have maintained the three-year period and whether the definition should be expanded to include those in hospice or respite care, the hon. Lady hinted at the answer.
On the question of where we have maintained the three-year period and whether the definition should be expanded to include those in hospice or respite care, the hon. Lady hinted that the answer was the potential complexity. It would be impractical to have a relief that allowed someone moving in with relatives to claim the longer final period, so it is fair that the relief is only for people with disabilities as defined in schedule 1A to the Finance Act 2005.
The word “disabled” is defined elsewhere in the tax code and making use of an existing definition ensures consistency and means that the definition is already understood by tax advisers. Introducing a new definition would add further complexity to the legislation. We keep all aspects of the tax system under review and we will act if there is evidence that people who are intended to benefit by the relief are being excluded.
On introducing a new definition of “care home”, there is no such definition in the tax code and no agreed definition in general use in the UK. To make the legislation easily understood, it was thought clearer to introduce the straightforward definition:
“an establishment that provides accommodation together with nursing or personal care”.
That means exactly what it says. It includes people with disabilities in respite care, but to include sheltered housing would be difficult as there is no legislative definition.
It is worth pointing out that there is a separate relief when someone has been absent from a property for work, and the proposals make no changes to those rules. They allow a person to receive up to four years’ relief in addition to the final period if they cannot live in their main residence because they are employed elsewhere, providing they do not nominate a new main residence during the time and they return to the property after they are required to work away from home. It is useful to note that those who are required to work abroad may still be able to benefit from the full private residence relief as long as they return to the same property when they are no longer required to work broad.
With that clarification, I hope the Committee is satisfied that the clause strikes the right balance between providing people with sufficient time to sell their home after leaving it while reducing the incentive to take advantage of the rules, and I hope the clause can stand part of the Bill.