The government continues to impose further restrictions on landlords. Further to the stamp duty increase for the purchase of a second property, and restricting finance cost relief for individual landlords against their rental income, in the last Autumn Budget, the government has also announced the removal of Lettings Relief in most cases and a reduction of the final period exemption provided under the Principal Private Residence (PPR) relief effective from 6th April 2020.
If you dispose of a residential property which has not been your main residence for the entire period of ownership, you may have to pay capital gains tax (CGT) on your chargeable gains after deducting PPR relief (PPR is due if you have occupied the property as your main residence at any point during the period of ownership).
Where a property is or has been occupied as the owner’s only or main residence, the last 18 months are currently considered to be automatically exempt. From 6th April 2020, the government introduces a reduction in this final exemption period from 18 months to 9 months.
The second change proposed will restrict the Lettings Relief on the sale of a property currently available to home owners who did rent their property after a period of occupation.
Under the current rules, home owners, who rent their property following a period of occupation before they decide to dispose/sale, can claim both PPR and Lettings Relief.
PPR relief covers the periods of occupation plus the last 18 months of ownership. The PPR relief is the gain multiplied by periods of occupation divided by the total period of ownership. In this context, ‘occupation’ means both actual occupation and the last 18 months deemed occupation.
Lettings Relief is an additional relief due if PPR has also been claimed. The relief currently provides up to £40,000 of exemption. Lettings Relief is the lower of the PRR, £40,000 and the amount of gain arising by reason of letting.
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 in the let property.
Example:
A gain of £100,000 for Mrs Smith living in a property 10 out of 23 years.
Before 5 April 2020
PPR for 10 years plus 1.5 years (18 months deemed occupation), so 11.5 years or 50% of the period of ownership.
50% of the gain are exempt from CGT so £50,000 of the gain is covered by the PPR.
The remaining 50% of the gain or £50,000 is defined as chargeable gain. The property was let for 13 years but 1.5 years was covered by PPR under the deemed occupation, therefore 11.5 years out of 23 years of ownership is gain arising by reason of letting, so 11.5/23 or 50% of the gain or £50,000. The letting relief is restricted to lower of the PPR, £40,000 and the amount of gain arising by reason of letting. Therefore, Letting Relief is restricted to £40,000.
Capital Gain £100,000
Less PPR relief (50,000)
Less Letting Relief (£40,000)
£10,000 liable to Capital Gain Tax (CGT)
The rates applicable (for 2019/20) are 18% basic rate and 28% higher rate.
That means a CGT bill of £2,800 (assuming gain was taxed at 28% and annual exemption utilised elsewhere).
From 6 April 2020
The years covered by PPR are reduced from 11.5 to 10.75, so 10.75/23 of the gain is covered by PPR or £46,739. The Letting Relief is not available under the new rules as Mrs Smith did not share occupancy with the tenants during the periods of let.
Capital Gain £100,000
Less PPR relief (46,739)
Letting Relief £0
£53,261 liable to Capital Gain Tax (CGT)
That means a CGT bill of £14,913 (assuming gain was taxed at 28% and annual exemption utilised elsewhere).
The new rules will mean an increased tax bill under the above example of £12,113 for Mrs Smith.
The Letting relief and PPR final period deemed occupation relief are only available to landlords who have lived in the property they rented out.
The deemed occupation relief changes will not apply for people who are disabled or selling for the purpose of moving to a care home. In these instances, the last 36 months will remain exempt.
The above summary has been prepared for information purposes only and it should not be relied upon in making decisions. If you require any additional information in relation to the above, please send your questions to [email protected]
