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Changes to landlord Capital Gains Tax rules

Changes in relation to Principal Private Residence (PPR) and letting relief were introduced on 6th April 2020.

This means that landlords who currently rent out a property they have previously lived in could now face a higher tax bill when they come to sell the property. If you have never lived in your rental property, the changes will not impact you.

The changes are as follows:

  • The final period exemption will be reduced from 18 months to nine months where a property has at some point been your principle private residence.
  • A restriction to “letting relief”, to periods when you have been in co-occupation with your tenants.
  • Amendment to the rules applicable to gains arising on properties which have changed ownership between spouses to ensure they are made fairer.
  • A reduction in the deadline to within 30 days of completion for reporting capital gains to HMRC where there is capital gains tax due, and for paying the capital gains tax arising.

These changes follow several moves which may deter people from holding property as an investment.

Restrictions on the deductibility of mortgage interest relief, increases in stamp charges on the purchase of second homes and the recent announcement that no fault evictions could be banned have caused some landlords to consider their options.

Temporary relaxation of the new CGT filing deadline

HMRC has announced a temporary relaxation of the new filing deadline. This will apply to transactions completed between 6th April and 30th June 2020. HMRC will not issue late filing penalties as long as the CGT payment on account returns are filed by 31st July 2020. Transactions completed from 1st July 2020 onwards will receive a late filing penalty if they are not reported within 30 calendar days of completion.

Final period exemption reduced to nine months

At present, you get relief from Capital Gains Tax (CGT) for the period you lived in your property plus the last 18 months of ownership – even if you weren’t living in it at the time.

From 6th April 2020, only the last nine months of ownership of a property that has been the taxpayer’s main residence will attract relief, instead of the last 18 months of ownership.

This period is extended to 36 months for persons who are disabled or resident in a care home and these special rules will continue to apply.

Letting relief

The change to letting relief will likely have a bigger impact for most landlords.

Letting relief only applies where you have lived in a property as your main residence in the past. Currently, lettings relief provides up to £40,000 of relief or £80,000 for a couple to people who rent a property that they have previously lived in as their main home.

From April 2020, the relief will only apply where the owner is sharing occupancy of the home with a tenant. In most cases landlords do not share occupancy so the relief will cease to apply.

Impact of proposed changes

The best way to understand the proposed change is to look at an example.

Assume the following apply:

  • The landlord has owned the property for 10 years
  • The landlord lived in the property for the first two and a half years of ownership
  • They rented the property to tenants after they moved out
  • They made a gain of £100,000
  • The client has used up their annual exemption – the amount of gain which is tax free
  • They are a higher rate taxpayer

Pre-6th April 2020

 

New rules

 
 

£

 

£

Gain

100,000

Gain

100,000

PPR relief – (2.5 years plus the last 18 months)

(40,000)

PPR relief – (2.5 years plus the last 9 months)

(32,500)

Letting relief

(40,000)

Letting relief

nil

Chargeable gain

20,000

Chargeable gain

67,500

In our above example, the amount of taxable gain has risen by £47,500. We also assume there is no annual exemption and the landlord pays tax on the gain at 28%. The additional tax falling due on the gain of £47,500 could therefore be an extra £13,300.

If people are currently renting out their former home and are considering selling the property soon, they will need to think about how the changes will affect their tax position and any other tax planning opportunities available.

Transfer between spouses

The general rule for transfers between spouses is that they take place on a no-gain/no-loss basis. This means that where you transfer your only or main residence to your spouse, their period of ownership will be the same as yours, even if that period started before you got married. They will also qualify for principle private residence relief for any period before the transfer, where the property was your principle private residence, as long as the property is the principle private residence for both of you at the time of the transfer.

The new rules being introduced from 6th April 2020 will ensure that full Principle Private Residence relief won’t be available where the property previously let out was not used as a main residence, but will also ensure that where a property was previously used as a principle private residence, but wasn’t used as such at the time of the transfer, the gain will now qualify for PPR relief.

How TaxAssist Accountants can help

We would be delighted to help you understand how the proposed changes impact your tax position and can produce a report which illustrates the tax impact on you.

In certain cases, it may be that tax planning can be considered to reduce the impact of some of the changes. For more information, please contact us online here or call our team on 020 3196 4888.

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