Changes to landlord Capital Gains Tax rules

Changes in relation to Principal Private Residence (PPR) and letting relief are expected to come into force in April 2020.

This would mean that landlords who currently rent out a property they have previously lived in could be facing 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 proposals are being consulted on and the anticipated changes are as follows:

  • The final period exemption will be reduced from 18 months to 9 months
  • Letting relief will be reformed so that it only applies where an owner is in shared occupancy with a tenant

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.

Final period exemption reduced to 9 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 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

Current rules

 

Proposed changes

 
 

£

 

£

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.

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.

By Andy Gibbs ATT, CTA
Last updated September 2019

Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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