From April 2020, HMRC are changing two important tax concessions that apply to landlords letting property that they as owners have previously occupied at some point as their home (Principal Private Residence (PPR)).
The first is the reduction of the present rule that exempts the final 18 months of ownership from any Capital Gains Tax (CGT) charge. From April 2020 it is proposed that this will be reduced to 9 months.
The second change is to letting relief. Presently, if a landlord has previously occupied a rental property, when it is sold the landlord can claim lettings relief.
Briefly, this relief is currently the lowest of:
- The same amount you got in PPR,
- £40,000, or
- The same amount as the chargeable gain you made from letting your home.
The example that illustrates this in action reproduced from the Gov.uk website follows:
You make a gain of £120,000 when you sell your home, which you owned for 12 years. You lived in the whole property for 6 years, then you let it out in full for 6 years.
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 years (62.5% of the time) you owned the property.
You get Private Residence Relief on the same proportion (62.5%) of your gain. This means you will not pay tax on £75,000 of the gain.
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 Letting Relief.
Because you made a chargeable gain of £45,000 while letting your property (and got £75,000 in Private Residence Relief) you can claim £40,000 in Letting Relief. This means you’ll pay Capital Gains Tax on £5,000.
Change to letting relief from April 2020
From April 2020, lettings relief will still be available, but only if you as the landlord are living in the same property – in shared occupancy – as your tenant.
Action to take before April 2020
If you are already considering the sale of a rental property, that you have previously occupied as your home for a period of time, you may want to consider bringing your plans forward as this may have a positive impact on any CGT payable when you do sell.
We would be happy to help you consider your options, please call if you need advice on this topic.