The government continued its cash grab on landlords in the last Autumn Budget. Further to the stamp duty increase and mortgage interest restriction, the government has also announced the removal of letting relief and a reduction of the deemed occupation period allowable under Principle Private Residence (PPR) relief (commencing in April 2020).
In a nutshell, if you sell a property (and especially if you own more than one property), you may have to pay more Capital Gains Tax (CGT).
You pay tax on your ‘chargeable gains’, i.e. your gains net of any PPR relief you are eligible for if you have occupied the property as a main residence at any point during ownership. In effect, PPR relief protects main homes from CGT. Currently, there is no CGT if you sell a property that you have lived in, as your main residence, throughout the period of ownership. In instances where you have lived in the property at some point but not for the full duration of ownership, the last 18 months are currently considered to be automatically exempt.
The November 2018 Budget announced a proposed change in the final exemption period, reducing it from 18 months to 9 months. There will be no change for people who are disabled or people selling for the purpose of moving to a care home. In these instances, the last 36 months will remain exempt.
A second proposed change involves second home owners who rent their property following a period of occupation before they decide to sell, counting on what’s called ‘letting relief’. Typically, PPR relief would be claimed for the period(s) of occupation plus the last 18 months of ownership and letting relief would be claimed for period(s) when the property was let. The latter is a valuable relief that currently provides up to £40,000 of exemption (£80,000 for a couple) to people who let a property that had previously been their main residence. Currently, lettings relief is the lower of:
- PPR relief amount
- Lettings chargeable gain amount
Starting from April 2020, it is proposed that lettings relief will only apply where the owner is sharing occupancy of the home with the tenant(s) under the same roof.
Example: Mr Cozy makes a gain of £120,000 on sale of the property after living in it for 5 out of 10 years. He met a new partner and they have moved in together, so it seemed appropriate to rent out his property, but he has now decided to sell. Currently, he gets PPR relief for five years plus the last 18 months (so six and a half years or 65% of the period of ownership) resulting in 65% of gains being exempt from CGT. Therefore, Mr Cozy won’t pay tax on £78,000 (£120,000*0.65) of the gain. The remaining 35% (£42,000) gain is not covered by PPR and this represents his chargeable gain. At this point, under current rules, lettings relief is applicable to the remainder.
At the moment Mr Cozy can claim a valuable £40,000 in lettings relief. That means he will pay CGT on £2,000 – resulting in a likely tax bill of £560 (assuming gains are taxed at 28% and he has used his capital gains annual exemption elsewhere).
But from April 2020 the calculation looks very different. The £78,000 figure above falls to £69,000 (£120,000*0.575), representing the five years and final exempt nine months, which means a higher chargeable gain. More importantly, no lettings relief would be applied in this example. That means Mr Cozy will incur a CGT bill of £14,280 (assuming all of his gain was taxed at 28% and again assuming he has used his capital gains annual exemption elsewhere).
This represents an increased tax bill of £13,720 for Mr Cozy.
This letting relief removal and PPR final period change will not affect landlords who have never lived in the property they rented out.
This publication has been prepared by RRL LLP. It is to be treated as a general guide only and is not intended to be a comprehensive statement of the law or represent specific tax advice. No liability is accepted for the opinions it contains, or for any errors or omissions. All rights reserved.