The government has made its intention to increase tax on landlords clear over the last few years. Further to stamp duty increases, mortgage interest restriction and the higher capital gains tax rates we currently have for residential property they have recently announced further penal changes to letting relief and principal private residence (PPR) relief.
At a basic level, PPR relief means that any increase in the value of your home is tax free. This rule is simple if you (and your spouse) live in a house from the day you buy it until the day you sell it.
Complications can arise if you move to a new house and decide to keep multiple properties as you (and your spouse) are only allowed to claim PPR on one house at any time.
When one of these houses are sold you will need to split your gain between the time it was your main property and the time it wasn’t. You’ll then get exemptions for the time it was your home and pay tax, if necessary, on the remainder.
To provide for scenarios where you struggle to sell your previous home there is also a period of deemed PPR relief which covers the final 18 months of ownership to allow full exemption from tax if it takes you a little longer to sell your previous home than you originally thought.
That said, this deemed occupation covers any home you have lived in and therefore you may have moved out many years ago but are still entitled to deemed PPR relief on the final 18 months of ownership.
From April 2020 this deemed period is being restricted to 9 months.
As an example, let’s assume you have owned a property for 15 years, lived in it for the first 5 years and then moved out. Over the entire period of ownership, the property value has increased by £150K. From April 2020 your chargeable gain will increase by £7.5K meaning additional capital gains tax of £2,100 if you are a higher rate taxpayer or £1,350 if your gain is within basic rate tax. This is because an additional 9 months out of the 180 months of ownership will become taxable (9/180 x £150K).
There are exemptions to this for people who are disabled, or people are selling to move into a care home. For these individuals the period remains at 36 months.
A second more significant proposal involves changes to letting relief. This relief is currently available to people who have let out a house which at some point has also been their main home. Typically, PPR would be claimed for the period of occupation (plus the final 18 months, 9 months from April 2020) with some or all of the remainder being covered by letting relief.
The degree at which the gain during the period is covered by letting relief is restricted to the lower of:
- The total PPR claimed
- The chargeable gain attributed to the period of letting (on a linear basis)
From April 2020 it is proposed that lettings relief will only apply where the owner shared occupancy of the home with the tenant during the letting period.
This will potentially mean there are many individuals who have let a prior main home out for several years and currently believe that up to £40K of this gain will be exempt from tax. If a sale is made post April 2020 then their tax bills could be increased by £11,200. A basic rate tax payer under the same conditions would see a rise of at least £7,200 but, in these circumstances it is certainly possible that some of their gain would push them into higher rate tax as well and increase the bill further.
In the previous example where the individual lived in the property for 5 years, if we now assume they let the property out for the remaining 10 years, then the computations for tax prior to and after April 2020 are as follows
|Pre April 2020||Post April 2020|
|PPR||£50,000 (60/180 months)||£50,000 (60/180 months)|
|Deemed PPR||£15,000 (18/180 months)||£7,500 (9/180 months)|
|Tax @ 28%||£12,600||£25,900|
– PPR = £65,000
– Gain during letting period £85,000 (102/180 x £150,000)
There are many variables which come into play when selling property. These new rules are only a couple of things to consider. If you are thinking of selling a property in the near future which was once your main home, then we would suggest you contact us at the earliest opportunity to look at how the change in rules will affect your specific circumstances.