If you’re a buy-to-let landlord, it’s likely you’re already familiar with several of the tax changes that have targeted the sector in recent years.
But for those planning on selling their property in 2020 or later, there are more changes to come.
One of these is a restriction to lettings relief, which can currently be claimed by qualifying landlords, to reduce their capital gains tax liability on up to £40,000 of their chargeable gain.
From April 2020, this will only apply when the owner of the property is in shared occupancy with the tenant.
In addition, the final period exemption for private residence relief will be reduced from 18 months to 9 months, meaning you may see a higher tax bill if you sell a property in or after 2020/21.
To understand the way this change works, you first need to understand how capital gains tax applies when you sell a property.
Capital gains tax is incurred when you sell something that has increased in value, and is charged on the gain you make by doing so.
If you’re a higher or additional-rate taxpayer you’ll pay 28% on your gains from residential property, while for basic-rate taxpayers the rate is 18%.
If you’re selling your main home, you may qualify for private residence relief, which removes the liability for capital gains tax.
This applies to the years that you lived in the property, and to the last 18 months you owned it (known as the final period exemption).
Your property must meet certain conditions for private residence relief to apply, including not being used solely for business purposes, and not exceeding 5,000 square metres in total.
If you let part of your property out, you may also qualify for lettings relief of up to £40,000.
To illustrate the way these reliefs work, let’s say you sold a property in 2018/19 and made a gain of £150,000.
You owned the property for 20 years, and lived in it as your main residence for 10 of those years.
If you qualify for private residence relief, it will apply to 11 years and six months, or 57.5% of the time you owned it.
In other words, you’ll have no capital gains tax to pay on £86,250 of the gain you made – leaving the remaining £63,750 as a chargeable gain.
You can then take away lettings relief as long as you meet the conditions for it. This is the lower of:
- the amount you got in private residence relief (in this example, £86,250)
- the chargeable gain you made from letting your home (£63,750)
So, having deducted the £40,000, you’d be liable for capital gains tax on £23,750 in total.
From next April, that figure would instead come to £29,375 under the change to the final period exemption.
If you did not share occupancy of the home with your tenants, however, it could increase to as much as £69,375.
Several other rules affect your capital gains tax liability, and we’re happy to provide advice on which ones apply to you.
To talk about selling a property or managing your tax affairs as a landlord, contact us at 01628 631056 or email firstname.lastname@example.org