Buy to let landlords have been firmly within the sights of Chancellors of the Exchequer in recent budgets with changes to stamp duty land tax, relief for finance costs and the abolition of the wear and tear allowance to name but three of the recent tax hikes.
The October 2018 Budget must therefore have been a relief to many Landlords with minimal changes for most and the higher personal allowance and raising of the higher rate tax threshold providing a welcome relief to all.
There were, however, two changes that could significantly affect the capital gains tax charge for some landlords when they sell a rental property. The changes amend the main residence relief, and aim, according to the Government, to better focus relief on owner occupiers, but are likely to affect some landlords too.
Currently landlords can claim lettings relief against capital gains when disposing of properties that have at some point been their main residence. This relief is worth up to £40,000 (£80,000 for couples); in conjunction with the personal capital gains tax annual allowance, the maximum lettings relief effectively means the first £51,700 of gains (£103,400 for a couple) on a property which has been a main residence is tax free, saving up to £14,476 (£28,952 for couples) of tax.
From April 2020 this relief will only be available where the tenant occupied the property while the landlord is in occupation making this relief much harder to get. What’s not yet clear is whether periods of letting prior to April 2020 will qualify on the old basis. If not, this change effectively restricts lettings relief to Airbnb-type situations.
The second relief available to landlords where a property has previously been their main residence relates to the tax free exempt period at the end of ownership, which is currently 18 months (having previously been 3 years). From April 2020 this period will be reduced to 9 months again increasing capital gains tax due on the sale of certain properties.
Many of the landlords affected by these rules will be “accidental landlords” who needed to move but were unable to sell their own home and therefore decided to rent the property out until the market recovers or they could find a buyer. The lettings and final period reliefs were designed to protect the position of people with genuine difficulties in selling their homes and the changes could leave such people exposed to CGT. If you find yourself in this position it may make sense to try to bring forward a sale to avoid the new restrictions. For advice in this area, please email Andrew Noton or Clare Munro firstname.lastname@example.org, email@example.com or call 020 7490 7766.