Future foundations: focus on property (article 5)

Landlords still in HMRC crosshairs – sell now to avoid higher capital gains tax bills?

This article is the fifth in a series in which we focus on property issues in our bi-monthly e-newsletter for individuals and their families, Pathfinder – personal tax and wealth (sign up here). Over the next few editions of the e-newsletter we will further explore the most common property tax issues our clients are asking us about. Whether a landlord, or simply someone looking to utilise property as an investment for their (and their family’s) future, this series will seek to advise you on your options, and prevent you from falling foul of any unforeseen tax implications!

In this article we look at how upcoming changes to capital gains tax might affect property owners…

Last November’s Budget announcements included proposals (*) expected to change the rules governing how taxpayers disposing of residential property at a gain will compute the extent to which such gain is taxable.

Due to be introduced in April 2020 the new rules will apply in the following cases:

• Where a property has been used as the owners’ home but remains unsold at the time they cease their personal occupation;
• Where a property has been occupied both as the owners’ home and has been let at some stage during the period of ownership.

HMRC estimate that over 40,000 property sales every year fall into these categories…and most of these will see increased capital gains tax (CGT) bills arising post April 2020.

It’s important that property owners now consider the impact of these changes on their own circumstances to determine whether a sale ahead of April 2020 is worth considering.

The proposed changes

1. Final period of ownership
Private residence relief (PRR) allows a homeowner to generate a tax exempt capital gain on the sale of their house and it is this relief which keeps most property owners out of the CGT net.

If you let your home, however, you should expect a CGT bill to arise calculated by reference to the period of letting compared to the period of owner occupation – but see ‘lettings relief’, below.

Of assistance to taxpayers in such situations is a provision that currently allows homeowners to treat the final 18 months of ownership as owner occupation even if they weren’t living there at the time.

From April 2020 (with a few exceptions) this final exemption period will be cut from 18 months to 9 months resulting in a greater proportion of any gain being treated as taxable.

This change impacts both on those who have let their homes as well as those choosing to retain their former home on moving out.

2. Lettings relief
Lettings relief is an additional tax relief available on the sale of a property where that property has during the period of ownership both been occupied as the owner’s home and used as a residential let. Lettings relief can exempt an additional gain of up to £40,000 per owner which is £80,000 for a property jointly owned by two people – with a consequent tax saving of up to £22,400.

Currently this (poorly understood) relief is easy to qualify for, but for disposals from next April it is proposed that it will only be available where the home owners and their tenants share occupancy at the same time.

This change will severely limit the number of owners eligible for lettings relief leaving greater sums liable to CGT than is today the case – and the indications are that there may be no transitional rules, so any potential relief clocked up to date will be lost.

Summary

The reduction of the final period exemption and the effective end of lettings relief for most people will expose significant additional sums to CGT. Speak with your usual Kreston Reeves adviser, to ask that they consider the likely tax impact of these changes on your own circumstances.

(*) The April 2020 changes are currently “under consultation” (closes 1 June 2019) and the final position may well not be known until late Autumn.

Look out for the next property focussed article in June’s edition of Pathfinder – Personal tax and wealth update. To sign up to receive this complimentary bi-monthly newsletter, and other Kreston Reeves publications/event invitations, please click here. There is also the option to subscribe to receive our exclusive ‘property and construction’ sector updates, events and webinars for those with particular interest in this sector.

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