Increases in Capital Gains Tax on Residential Rental Properties

Residential PropertyFrom 6 April 2020 based on current proposals, Capital Gains Tax (CGT) payable on the sale of residential rental properties will potentially be increasing as the government continues to make investing in buy to let properties less attractive for investors.

As announced in last year’s budgets, where you have previously lived in (or currently live in) the property as your main home the CGT payable on the sale of the property will potentially increase. This is due to following two changes which are schedule to be introduced from 6 April 2020.

Currently where you have lived in a property as your main home, the proportion of the profit from the sale of the property, which relates to any period you lived in the property was not charged to CGT, due to the availability of principal private residence relief (PPR). In addition to this, certain other periods where you did not live in the property (including the last 18 months of ownership) are also available for relief from CGT.

The other change is in relation to a relief known as lettings relief, which is available to exempt periods from CGT where the property has been let (within certain limits) and a claim for PPR has been made.

Under the new rules, the deemed occupation period of the last 18 months of ownership will be reduced to 9 months and lettings relief will only be available where you have shared the occupancy of the property with the tenant (i.e. where you have rented out part of the property, but have continued to live in the rest of the property).

This may have a substantial impact on the level of capital gains tax payable on the disposal of a residential property which you have lived in. These changes have no impact on landlords who have never lived in the property or on commercial properties. Please see the following example of the potential effects of the changes being introduced.

Example of the effect of the changes in the CGT reliefs available for a residential rental property, previously occupied as your main home.

The facts are as follows:

  • The profit of the sale of the property was £100,000.
  • The property was owned for 10 years and during this period was occupied as the investors main home for 5 years and rented out for another 5 years.
  • The investor has no other capital disposals in the year and is a higher rate tax payer.
Current RulesNew Rules (from 6th April 2020)
Capital Gain

£100,000

£100,000

Relief for property being a main home for 5 years (5 out of 10 years)

(£50,000)

(£50,000)

Relief for last 18/9 months of ownership

(£15,000)

(£7,500)

Letting relief*

(£35,000)

`

£0

Capital gain

£0

£42,500

Annual exemption for 2019/20

£12,000

£12,000

Chargeable gain

£0

£30,500

Capital Gains Tax payable at 28%

£0

£8,540

*Lettings relief is the lower of the following:

  • The chargeable gain of £35,000
  • The main home relief of £65,000
  • The letting relief limit of £40,000 per person.

If you are currently considering selling one of your properties, which you have previously lived in it may be worth considering selling the property prior to 6 April 2020 in order to benefit from the existing reliefs.

Should you wish to discuss the effect of the above in more detail or discuss your property tax affairs in more details, please contact us for a FREE initial consultation.

This article provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted by the author or Essex Abel Ltd.