Lettings Relief Changes: £40,000 due to be withdrawn in April 2020
If you own a second property that you used to live in, the level of lettings tax relief against capital gains tax will be changing significantly in April, so now could be the time to consider selling.
Why? The government are planning to half the period of deemed occupation allowable under Principle Private Residence (PPR) relief in April 2020, as well as removing £40,000 per person of Lettings Relief for most second home owners.
Property assets are taxed under Capital Gains Tax (CGT), unless they are your main residence, when you come to sell them. To calculate capital gains tax very simply, take the value at sale, subtract the value that you purchased the property for, subtract your annual capital gains tax allowance and you are left with your residual gain. This gain will be taxed at 28%, for higher rate taxpayers. Capital gains tax calculations will involve other considerations and the above should be considered a simple way to start on a capital gains tax calculation.
Where you have previously lived in that property, as your main residence at any point during the period of ownership, you can currently claim PPR for the period in which you have occupied a property as well as the last 18 months of ownership.
Lettings Relief changes are coming in April 2020
The November 2018 Budget announced that this 18 month exempt period is due to be slashed in half to 9 months in April 2020.
Lettings Relief is also being withdrawn for the majority of second property owners. This relief currently provides a £40,000 exemption (£80,000 for couples) who let a property that was once their main residence.
From April 2020, you will only get this benefit if you are sharing occupancy of the home with the tenant(s) under the same roof. This is far less likely to happen and therefore impacts many private second property owners.
Lettings Relief Example
Mr Blogs met his current partner 7 years ago and they decided to move into her property and rent out his flat.
7 years on, they now need to sell his old flat. For purposes of this example. we assume that he is a higher rate tax payer and that his annual allowance for capital gains tax (CGT) has been used elsewhere.
Mr Blogs makes a gain of £150,000 on the sale of his property after having lived in it for 7 out of 14 years in which he has owned it.
At present he gets PPR relief for the 7 years (84 months), plus the last 18 months (102 months) of the period of ownership (being 168 months), resulting in 60.71% of the gains being exempt from CGT, i.e.102/168 months.
Therefore, £91,065 of the gain is exempt from capital gains tax (£150,000 x 60.71%). The remaining £58,935 (39.29%) gain is chargeable under capital gains tax at 28%.
However, Mr Blogs can currently claim an extra £40,000 of Lettings Relief, meaning that he pays capital gains tax on just £18,935 (£58,935 – £40,000).
So in total, Mr Blogs would only have to pay capital gains tax of £5,301 (£18,935 x 28%) on his gain of £150,000.
Lettings Relief Changes
If he sells the same property after April 2020, Mr Bloggs will have the 18 month period of PPR reduced to 9 months and importantly Lettings Relief will have been withdrawn.
Under the new rules, less of the gain is exempt from capital gains tax only £83,040 (£150,000 x 55.36%), which is the 7 years of ownership and the reduced exempt nine months, i.e. 93/168 months.
Vitally, no Lettings Relief would be applied from April 2020 meaning an extra £40,000 will be exposed capital gains tax at 28%.
Therefore the new CGT bill will be £18,748, being 28% of the £66,960.
This is an increased tax bill of £13,447 (£18,748 – £5,301) a staggering 354% increase, if he sells the property after April 2020 compared to selling the property now.
If you own a second property, which you have lived in in the past, it could be the time to consider making changes to your overall portfolio. (please note these changes will not affect landlords who have never lived in the rented property).
If you have any questions on anything covered in this article, please contact Wingate Financial Planning. Together we can help work through your financial situation, identify and prioritise your long-term objectives and help you to make informed decisions about your money that will help you achieve these goals.