Two changes to the private residence relief for capital gains tax (‘CGT’), announced in October’s Budget, could have a significant impact on tax liabilities for rented properties sold after 5 April 2020.
Many rental properties have previously been occupied by the owners as their homes. This can arise for a number of reasons; the owners may have become ‘accidental’ landlords when moving to another area, or made a conscious decision to hold on to a property as an investment when buying a new home jointly with a partner.
Whatever the background, on an eventual sale, valuable CGT concessions often reduce or eliminate the capital gains tax bill altogether.
Firstly, the last 18 months of ownership is currently added to the exempt period when calculating the taxable proportion of the gain.
Secondly, up to £40,000 of the non-exempt gain – £40,000 each for joint owners – can be tax free under ‘lettings relief’.
Lettings relief alone can save a couple up to £22,400 in CGT on a property sale. But measures announced in the Autumn Budget are set to reduce both reliefs significantly.
From 6 April 2020, the 18-month period treated as exempt will be reduced to 9 months. Ironically, as the housing market cools, this period was 12 months for many years before being increased first to 24 and then 36 months to reflect the difficult market conditions at the time.
In addition, lettings relief will only be available where the property is partly let whilst continuing to be the owner’s main residence. This actually restricts its availability to the situation envisaged when it was introduced – that people living in homes larger than they needed would be able to let part of them without the threat of CGT bills when they sold.
It may well be that some buy to let landlords, if planning a sale, or perhaps a gift or transfer into trust as part of their inheritance tax planning, should consider bringing forward their plans to take advantage of these reliefs before they are withdrawn.