Rules for two ancillary reliefs on Capital Gains Tax (CGT) relating to rented residential properties are changing. Changes to final period of property ownership, and lettings relief will apply to property disposed of from 6 April 2020 onwards. If you are planning to sell a property within the next couple of years, it may be beneficial for you to sell your property early in order to take advantage of the current preferential tax rules before they change.
Let’s look at the current rules for tax relief and see what’s changing.
Final period of ownership relief
Currently, the last 18 months of residential property ownership is exempt from CGT, even if this property is a buy-to-let and has never been your main residence.
The 18 months will be shortened to 9 months from 6 April, 2020. This change reflects HMRC’s further tightening on buy-to-let. The first shortening of final period exemption took effect from April, 2014, when it was reduced from 36 months to 18 months.
Letting relief – Letting relief will be abolished from 6 April 2020. Until then each owner may claim up to £40,000 on each by-to-let property that they sell.
The total amount of relief that you can claim for a let property is the lowest of:
- Private residence relief
- £40,000
- Chargeable gain arising from letting
In here, Private Residence Relief (PRR) is available even if you only lived in a property for part of the period that you owned it. If you bought a residential property, lived in it (as your main residence) for some time, then let it out, you can claim PRR for the period you lived in it. PRR represents the portion of capital gain attributable to the period during which the property was your main residence. The amount of capital gain remaining after deducting any PRR is called the chargeable gain.
Example
Emma and Colin jointly bought a property for £500,000 in August 2010 and lived in it for two years as their main residence until August 2012. They then let the property until May 2018 when they sold it for £850,000. The costs for acquisition and disposal were £20,000.
The reliefs they can claim are:
- Final period of ownership relief – 18 months
- Private Residence Relief – two years following their initial purchase
- Lettings relief – property had been their main residence and therefore qualifies
- Capital gains allowance – £12,000 per partner
|
Total |
Emma |
Colin |
|
| Selling Price |
850,000 |
425,000 |
425,000 |
| Purchase price |
500,000 |
250,000 |
250,000 |
| Purchase and selling costs |
20,000 |
10,000 |
10,000 |
| Net proceed |
330,000 |
165,000 |
165,000 |
| Ownership time(month) |
92 |
92 | 92 |
| Private residence time (month) |
24 |
24 |
24 |
| Final period exemption |
18 |
18 |
18 |
| Chargeable proportion |
54% |
54% |
54% |
| Chargeable gain before relief |
179,348 |
89,674 |
89,674 |
| Gain eligible for PRR |
150,652 |
75,326 |
75,326 |
| Lettings relief |
(80,000) |
(40,000) |
(40,000) |
| Chargeable gain |
99,348 |
49,674 |
49,674 |
| CGT Allowance |
(24,000) |
(12,000) |
(12,000) |
| Taxable gain |
75,348 |
37,674 |
37,674 |
| CGT due |
21,097 |
10,549 |
10,549 |
Now let’s look Emma and Colin’s situation if instead of selling their property in 2018, they sell it in May, 2020 – after the changes on the two reliefs take effect:
- they will lose lettings relief entirely
- they will get less relief from final period exemption (9 months instead of 18)
The CGT will become a hefty £59,000 – £38,000 greater than before the tax changes!
Other tips
Buy to let property owners can claim up to £40,000 lettings relief towards their share of gains from any property that they sell. This applies whether they own the property solely or jointly with a partner. Property owners can claim lettings relief on every property disposed of, in the case where they dispose of multiple properties in one tax year. This is unlike CGT allowance. Only one CGT allowance per tax year can be claimed against gains of all types in that year.
Mortgage early redemption charge is another factor to consider if you sell properties earlier in order to benefit from the lettings relief. If you rush to sell before the tax year ends, ensure that the benefit obtained from selling before the existing tax rules expire, more than offsets the mortgage early redemption charge.
If you plan to reinvest in property after the disposal of your existing properties and are only disposing of them in order to realise the benefit of the current tax rules before they change, do consider stamp duty. The cost of stamp duty may outweigh any tax relief that you gain from the early sale. Another interesting option you may wish to consider is to establish a limited company and sell your property to the limited company. This route is particularly favourable for high income earners. For more detail refer to previous article from Mpathy Accounting