In the 2018 Budget, Chancellor Phillip Hammond announced that the government would limit Lettings Relief to properties where the owner is in shared occupancy with the tenant and reduce the final period exemption from 18 to 9 months.
Since then, we have been waiting on the draft Finance Bill to review how the Chancellor planned for this limit to work and the effect this would have on people who have been letting their properties prior to April 2020.
The draft Finance Bill has now been published and, based on this, it is clear that lettings relief will not be available for the majority of landlords selling rental properties after 5 April 2020.
Currently, Lettings Relief provides CGT (Capital Gains Tax) relief where a property that has previously been the owner’s main residence, which has also been let, is sold.
The relief is capped at £40,000 per owner and is subject to other restrictions.
Principal Private Residence (PPR) relief is the relief that prevents properties which have been occupied as an owner’s main residence for the entire period of ownership being subject to CGT. Where in the final 18 months of ownership there has not been this occupation, currently the relief is given for this period. From the 5th April 2020, this period is reducing to 9 months.
What do landlords stand to lose?
Below is a comparison of a property sale with exchange on 31 March 2020 and 30 April 2020 and the difference that these changes make. In this example a married couple purchase a house on 1 April 1990 for £200,000 and lived there for 20 years. At which point they moved out and began letting the property. The property remains let until it is sold for £500,00 in 2020.
In this scenario, if contracts are exchanged on 31 March 2020 the gain subject to tax is £5,000, the highest amount of CGT payable on this would be £1,400. Alternatively, if the exchange of contracts is on 30 April 2020 then the gain is increased to £93,075, with potential CGT of £26,061
This will not be an uncommon result of these changes with Lettings Relief itself being worth up to £22,400 in tax savings for married couples.
Will anyone still quality for Lettings Relief?
The limit on Lettings Relief means you will only be entitled to the relief if during the letting period you also lived in the property as your main residence. In this situation you likely qualified for full PPR relief under the current rules, and therefore the number of people claiming Lettings Relief is likely to be largely reduced going forward.
Is there anything you can do?
There are some options to try to obtain or “bank” the relief before April 2020. These will be dependent on your circumstances but could include accelerating plans to sell the property or making a gift or transfer of the property before April 2020.
If you have rental properties that you have previously lived in as your main residence, then this change will affect you on the sale of the property, we therefore recommend reviewing your position now to see if any steps can be taken to mitigate this.
Every situation is different, the KJG tax team are able to provide advice based on your circumstances, for more information contact them today on email@example.com.
The legislation is currently draft and therefore may be subject to change.