The Government has announced plans to significantly reduce the tax reliefs that are currently available to landlords who sell properties that are, or have been, their main residence.
The rules that are coming in will see a number of changes that landlords need to be aware of:
Principal Private Residence relief
In addition to any periods during which the landlord has lived in the property as their main residence, the final 18 months of the total ownership period is also exempt from Capital Gains Tax (CGT) under the current rules.
For sales taking place from 6th April 2020, the exemption is set to be restricted, which will mean that the relief for the final ownership period is reduced to nine months.
Where the property has been a landlord’s main residence at some point, the lettings relief rules currently allow landlords to claim an additional CGT exemption of up to £40,000 (or £80,000 if a property is owned by two individuals).
From April 2020, the lettings relief will be effectively abolished. From then on, it will only apply in circumstances where the landlord is in joint occupation with their tenant. The changes are expected to be applied retrospectively so that relief will not be available for any qualifying periods prior to the 6th April 2020.
For example, if you bought a property in January 2002 for £100,000 which you lived in as your main residence until you moved out in December 2006. The property was then let out from January 2007 to December 2019 and was then sold for £250,000, realising a gain of £150,000.
You will obtain PPR and lettings relief of:
Period of occupation 5/18 years = £41,667
Last 18 months 1.5/18 years = £12,500
Lettings relief = £40,000
The relief will achieve a tax saving of between £16,950 and £26,367 (CGT of between 18% and 28%).
If you were instead to sell the property six months later in July 2020, the new rules would see the total relief reduce to £46,622, which would in turn increase your tax liability by between £8,558 and £13,313.
The Government is also set to introduce new reporting requirements. This will mean that landlords will need to submit a CGT return to HM Revenue & Customs and make a payment of the estimated tax liability arising within 30 days of selling a residential property. Currently, landlords have up to 21 months to report the gain and pay the associated Capital Gains Tax liability via their self assessment tax return.
If you’d like to discuss how these changes might impact you, speak to our tax experts today.