Update on Property Tax Reliefs

Further reductions in property tax reliefs

Hot on the heels of the mortgage interest relief restriction for rental properties comes a new restriction announced in last year’s budget. If you have rental income and:

  • The property you are renting is a residential property which
  • You have also lived in as your main home at any time,

then you need to be aware of two important changes that will be in place with effect from April next year. These changes could result in thousands of pounds of extra tax payable when you come to sell your property.

The changes to the Principal Private Residence (PPR) relief and Lettings Relief are summarised briefly in the note below. These changes will almost certainly increase your future capital gains tax position if you have ever lived in the property in the past. If you have never lived in your rental property then these changes will not affect you.

A change that will impact on anyone selling a residential property after 5 April 2020 however is that the gain will have to be reported and tax paid within 30 days of completion of the sale.

Planning

It is important that any landlords impacted by this change review their residential property portfolio and assess the impact of these changes. In some cases, the impact may be modest, and no action will be required, however if the PPR and Lettings Relief restrictions create an unacceptable increase in the CGT charge you may wish to consider crystallising the gain by way of gift or sale, either on the open market or to some other connected entity (for example a trust or limited company). Care will be needed to ensure the proverbial tax tail doesn’t wag the commercial dog. There may also be other costs to consider, for example SDLT or mortgage redemption costs, so the full picture is needed in order to make an informed decision.

If you would like us to review your position in this regard, please contact our Tax Director, Mary Tierney or our Tax Managers Melanie Tomkins or Lorraine Hickson.

Restriction of CGT Private Residence Relief & Private Letting Relief

If you have ever lived in your rental property as your main home then you are currently eligible for certain valuable capital gains exemptions when you come to sell the property. These exemptions are reducing from April 2020.

Capital gains tax on property is a complicated area but in general, under current rules, the following periods are exempt from capital gains tax:

  • Any periods of time when you have lived in the property as your main home
  • Any periods of time when you have more than one home and you have formally nominated the property as your main home
  • The last 18 months of ownership, provided you have lived in the property at some point
  • Any periods of time when the property is let out, provided that you have lived in the property as your main home at some point, called Lettings Relief. This particular relief is subject to certain maximum limits.

From April 2020 in most cases :

  • the final 18-month exemption is being reduced to only 9 months, AND
  • the Lettings Relief for the periods where the property has been let out is being completely abolished.

As simple example illustrates this:

For a single homeowner who is a Higher Rate taxpayer, £100k original property purchase, £250k sale price (ignoring costs of purchase and sale). Assuming he lives in the property for 5 years and then relocates and rents it out for 5 years, and that the maximum Lettings Relief is due.

On this basis, currently he would be allocated 5years + 18 months as his PPR, so PPR relief is 6.5/10 = 65%. This will fall to 57.5% after 5 April 2020 as well as losing Lettings Relief.

Ie in this example the tax for a higher rate tax payer (at 28%) will increase by £14,350 post 5 April 2020.