2nd November 2018
The headlines of this weeks budget didn’t contain anything extraordinary for the property market. The spending cap on Local Authorities was lifted to encourage councils to build more housing (in real terms the numbers will be small and take years to come through) and money was made available to Housing Associations to expand the shared ownership building programme. However, digging a little deeper, the small print contained two changes due to be implemented by April 2020 which will potentially have a significant financial impact on anyone who owns a property they rent to tenants which was, at some time, their own home. We have many clients in such a position.
Presently, if you sell an investment property you will be liable for Capital Gains Tax if you have made a reasonable profit. If that property was at any time your private residence, you qualify for what is known as Private Residence Relief (PRR). For example, you purchased a flat in 1998 for £60,000. You lived in it for 10 years as your main home. In 2008 you had to relocate for work due to the recession, so you let the flat to tenants, with the rent paying your mortgage and service charges, etc. In 2018 you sold it for £160,000. You have made a £100,000 gain, but not all of that gain was due to the letting period. You wouldn’t pay tax on the 10 year (120 months) period it was your private residence. You presently also get the last 18 months of ownership ‘tax free’. This makes a total of 138 months of the 20 years (240 months) of total ownership, tax free.
The additional 18 months is being reduced to 9 months in April 2020. In the example above, the reduction of the last 18 months tax free down to 9 months will cost a higher rate taxpayer an additional £1,050 in tax.
The second and more significant change is the abolition of Lettings Relief, which currently stands at a rather confusing lower amount of the PRR, £40,000 or the gain attributable to letting. Most of the cases I have come across have utilised the £40,000 figure, which is known as the ‘cap’. This will result in a higher rate taxpayer facing a bill for an additional £11,200 (28% of £40,000).
In my example above the tax payable today would be £700. In 2020 the same scenario would result in a tax bill of £12,950.
If you are one of the many buy-to-let landlords thinking ‘long-term’, and have no plans to sell the property in the next couple of years, this doesn’t really matter. I am very positive about the private rented sector and the buy-to-let market going forwards. But if you are one of the ‘reluctant landlords’ that emerged from the last recession holding onto their former home until property values recovered, and intend selling in the near future, delaying a sale and failing to sell before 5th April 2020 could prove very costly.
Government is to consult further on these two matters prior to April 2020, but with property sales taking some months to be concluded, I would be inclined to act sooner rather than later.