As announced in the 2018 Budget, key changes to Lettings Relief which are coming into force in Spring 2020 will affect many landlords by restricting the relief to only be available to those who share occupation of their house with tenants. This will apply to all disposals made on or after 6th April 2020.
First introduced in 1980, Lettings Relief effectively increases the amount of the gain that is sheltered from Capital Gains Tax (CGT), which is payable on the sale of a property. This can reduce the seller’s CGT liability on up to £40,000 of the gain, or up to £80,000 of the gain if the property is jointly held.
In addition to this, currently where an individual is selling a property that has previously been their main home, the last 18 months of ownership is always deemed a period of qualifying occupation for principal private residence relief purposes. This period of deemed occupation is being reduced to the last nine months of ownership for property disposals on or after 6th April 2020.
Another change previously reported which will have effect on disposals on or after 6th April 2020, is the requirement to prepare and submit a capital gains tax return for the sale of residential properties within 30 days of the completion of the disposal. Payment of the CGT liability calculated as being due will be payable within the same 30-day window.
Lettings Relief on Capital Gains Tax
In a nutshell – if you dispose of a property after 6th April 2020 that used to be your main home and has since been rented out, you may have to pay more CGT, as the amount that would have previously been subject to lettings relief will become chargeable.
So, an example.
Mr Smith and Mrs Smith purchased a house on 1st April 1990 for £200,000 and lived there for 20 years. After 20 years, the couple moved into a new property, and began letting out their previous home. They continue to let this until 2020, when the previous home will sell for £500,000.
If the couple sell the house on or before 5th April 2020, the gain subject to tax is £5,000, which is likely to be covered by their annual exemptions.
However, if the couple sell the house the following week, on the 7th April, the gain subject to tax increases to around £95,000, significantly increasing their CGT liability.
Will I qualify for Lettings Relief after April?
If you’re a landlord residing in the same property as a tenant and continue to live there as your main home throughout the letting period, you are still entitled to claim Lettings Relief after April 2020.
However, in instances where you do not live in the property which you let out, the relief would be lost, unless you lived in the property at the time it was let out.
Get in touch
Whilst the tax year end is still a while away, being prepared for upcoming changes can help you significantly in the long term and you may need to act now if you intend to sell a property before the new rules are implemented.
If you have a question regarding Lettings Relief or would like advice on a specific aspect of Tax and would like to get your tax affairs in order, please get in touch with your usual Smith Cooper contact or a member of our dedicated Tax Team.