The Association of Taxation Technicians has warned property landlords of a potential overhaul of letting relief rules, which could result in bigger capital gains tax bills when they sell their property.
Currently, landlords that have both lived in and let out their property during the lifespan of their ownership are entitled to letting relief on capital gains tax (CGT), up to a maximum of £40,000 (£80,000 per couple) of gains made during let periods.
However, the Government issued draft proposals to revise the relief last year, ahead of the 2020 Finance Bill, which would change the eligibility of some landlords overnight.
If the draft proposals are formally included in this year’s Finance Bill, from 6th April 2020, letting relief will only apply to homeowners that are occupying the property at the same time as their tenant i.e. those in shared occupation.
The draft legislation also states that the requirement for shared occupation will be applicable to letting periods before and after 6th April 2020.
Should the proposed changes be implemented, many property owners who let properties after they move out will lose the maximum letting relief they would have been entitled to for each let period, with very little time between now and April to benefit from it.
At present, they get relief from CGT for the period they lived in their property plus the last 18 months of ownership – even if they weren’t living in it at the time. However, 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.
The draft proposals also cover another major issue that is likely to affect landlords and second homeowners especially.
From 6th April 2020, UK residents who sell residential properties, resulting in tax being payable, will enter new reporting rules in which a return will need to be filed and the notional CGT paid within 30 days of completion
Michael Steed, Co-chair of the Association of Taxation Technicians’ (ATT) Technical Steering Group, said: “Someone who was entitled to the maximum letting relief under the old rules, but sells on 6th April 2020, could be up to £11,200 worse off than if they had sold a day earlier on 5th April 2020.
“At the same time, they will also be subject to new rules – which have already been legislated – requiring them to pay that tax much earlier than they would have previously.”
Steed confirmed the ATT is imploring the Government to avoid a potential “cliff edge effect” on letting relief by implementing transitional arrangements that “avoid the retroactive effect of the policy”.
“We recommend that if the shared occupation change to lettings relief goes ahead, any entitlement built up under the old rules should be frozen and preserved at 5th April 2020, with the new conditions only applying to let periods after that date,” added Steed.
Mortgage interest tax relief is another controversial issue for buy-to-let landlords. Since April 2017, the Government has been phasing out the amount of mortgage interest a buy-to-let landlord can deduct from their rental income in their self-assessment tax returns.
From April 2020 landlords can’t deduct any mortgage expenses from their rental income. Instead, they may only claim a tax-credit, based 20% of their mortgage expenses.
How we can help
At TaxAssist Accountants, we would be happy to help you understand how the proposed changes impact your tax position and can produce a report which illustrates the impact on your finances.