Taxpayers can currently obtain a rather generous tax relief (known as ‘Lettings Relief’) on sales of buy-to-let properties. This applies if they have been rented out a property which has been their main residence. However, changes in Lettings Relief will be coming into effect in the near future.
The lettings relief is currently the lowest of:
- The Principal Private Residence Relief (PPR)
- The gain in the let period
This means that the relief can reduce the gain on the sale of a property by up to £40,000 if owned individually, or up to £80,000 if owned jointly.
For disposals after 6 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.
The 2018 Budget has also proposed changes to PPR. Currently, the owner does not have to pay Capital Gains Tax (CGT) on gains made in the final 18 months of ownership. From April 2020, this exemption will be reduced to nine months.
Karen purchased a house for £250,000 on 1 January 1999. She lived in this house as her main residence until 31 December 2010, after which she let it out as a buy-to-let and moved into a new property. She then sold the house for £400,000 on the dates shown below.
If disposed 31 December 2019
The net gain on the property (excluding selling costs) would be £150,000 of which Karen would be eligible to PPR of 162 of the 252 months of ownership (including the final period exemption). This means that £96,429 of the gain is eligible for relief.
The remaining potential taxable gain is therefore £53,571.
Karen can take advantage of lettings relief of £40,000 leaving her with a net gain of £13,571. After utilising her Annual Exemption of £12,000, her taxable gain will therefore be £1,571. If she is a higher rate tax payer her Capital Gains liability will be £440.
If disposed 31 December 2020
The net gain on the property (excluding selling costs) would be £150,000 of which Karen would be eligible to PPR of 153 of the 264 months of ownership (including the final period exemption). This means that £86,932 of the gain is eligible for relief.
The remaining potential taxable gain is therefore £63,068.
As Karen was not in shared occupation with her tenants, Lettings Relief no longer applies. After utilising her annual exemption of £12,000 (assumed), her taxable gain will therefore be £51,068. If she is a higher tax payer her Capital Gains liability will be £14,299.
Please note that the special rules for the disabled and those in a care home will not change following the consultation.
Changes in Lettings Relief could have a significant effect for you. If you hold buy-to-let property and could be affected by this change, it may be worth discussing your options with our chartered accountants to help minimise your tax liability.
If you wish to speak to a member of our team, please contact us.