Landlord tax relief – changes coming from April 2020

Landlord Tax

Landlord tax relief – changes are coming!

If you are a landlord with a buy to let residential property, and are considering selling, then read on as timing is everything. A day’s difference on completion could result in an unexpected and substantial tax liability!

There are BIG changes coming to the rules for landlords regarding the way capital gains tax relief is treated on residential properties.

These changes will come into effect from 6 April 2020 and will mean that a number of people will be substantially worse off if they sell their property on or after that date, than they would have been should they sell on or before 5 April 2020.

Timing is everything – read on and we will try to keep this as simple as possible:

Under the current rules Landlords are eligible for tax relief on residential properties that used to be their main residence as follows: 

  • You will pay Capital Gains tax on your chargeable gain, which is your gain less any private residence relief that you are eligible for. 
  • You get full relief for:
  • The years you lived in your home
  • The last 18 months you own the home, even if you are not living there at the time. 
  • Or for 36 months, if you only own one home and you are disabled, in long term residential care or sold the property before 6thApril 2014.

You may then also qualify for lettings relief, which you can claim if you have let out your home during the period in which you did not live in it.

  • Lettings relief is calculated as equal to the lower of the value of 
    • The private residence relief which you claimed
    • £40,000
    • Or the value of the chargeable gain which you made by letting your home out.

So, let’s look at an example:

  • You bought a house in 2007 for £200,000.
  • You lived in it for 6 years as your principle private residence.
  • You then moved in with your partner and let out your property for a further 6 years.
  • You sold it this year for £320,000.

So, in this instance, you make a gain of £120,000.

  • You get private residence relief for the time you lived there (6 years). 
  • You also get relief for the last 18 months you owned the property even though you were not living in it. 
  • This means you get private residence relief for 7.5 of the 12 years you owned the property. 
  • This is then apportioned to the gain, meaning that you will pay no CGT on in this case 62.5% of the £120,000 gain. Here, £75,000. 
  • The remaining 37.5% (£45,000) of the gain not covered by private residence relief is your chargeable gain. 
  • If you qualify for private residence relief and have a chargeable gain, you may also qualify for lettings relief – see above.

In this scenario, you made a chargeable gain of £45,000 while letting your property and you had £75,000 in private residence relief, which means that the lower rate of £40,000 of letting relief will be applied. Leaving a balance of only £5,000 liable for any Capital Gains tax. 

As the annual CGT exemption allowance is currently set at £12,000 per person, assuming you have not fully utilised this allowance in this instance, you would be able to have a £120,000 gain without paying any tax whatsoever.

So, what’s changing in April 2020?

The November 2018 budget announced two significant changes:

  • A reduction in the final exemption period, from 18 months to 9 months. 
    • There will be no change for people who are disabled or people selling for the purposes of moving to a care home, in these instances the last 36 months will remain exempt. 
  • A change to lettings relief, whereby it will from April 2020 will only apply where the owner is sharing occupancy of the home with the tenant under the same roof (rent a room!)

So, if we look at the example above, you make a gain of £120,000, you qualify for private residence relief for the 6 years you lived there, and only the final 9 months of your ownership of the property, so 56.25% of the time. This means that £67,500 of the £120,000 gain would qualify for this relief.

However, the additional £40,000 of lettings relief would no longer be available, leaving £52,500 of gain to consider.

If you still have your full annual exemption available, you would be able to reduce the gain on which tax would be due to £40,500 (assuming 2019/20 annual exemption rates) which would equate to £11,340 if you are a higher rate tax payer, or a tax bill of £7,290 if you are a basic rate tax payer.

What a difference a day makes!!

As always, if you would like any more information on this, or any other subject relating to accounts or tax, then please do not hesitate to contact any of the IN Team.

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