When you sell your home for more than you paid for it, you will normally be able to take advantage of private residence relief (PRR) which provides an exemption from the capital gains tax (CGT) charge.

For many years, PRR has also included some valuable ancillary reliefs which have enabled individuals beyond owner occupiers to benefit from CGT relief when they come to sell their property.

The Government has taken action which in its words better focuses PRR to owner occupiers.  From April 2020, the rules on two ancillary reliefs, namely lettings relief and final period exemption will change.  These changes will have a significant impact on the amount of CGT payable by individuals who decide to sell rented property which at some point during their period of ownership has been their home.

Lettings Relief

Currently, CGT relief of up to £40,000 (£80,000 for a couple) is available for those who let out a property that is, or has been, their home.  This enables landlords to claim CGT relief, even if they might not have lived in the property themselves for a long time.

From April 2020, this relief will only apply to landlords who are in shared occupancy with their tenant.

Final period exemption

The final period exemption currently means that any gains made in the final 18 months of ownership will be exempt from CGT, even in circumstances where the landlord is not an owner occupier during that period.

From April 2020, the final period exemption will be limited to the last 9 months of ownership.

Impact on the amount of CGT payable

By way of a example,Mr Jones sold a property on 8 August 2019 which he has lived in for 5 out of 10 years of ownership and made a gain of £80,000.

Under the present rules, Mr Jones will benefit from PRR for five years (being his period of occupation of the property) plus the last 18 months of ownership of the property (so 6 and a half years or 65% of the period of ownership).  This means that £52,000 of the gain will be exempt from CGT.  The remaining £28,000 is not covered by PRR and this represents his chargeable gain.  However, under current rules lettings relief is available to exempt the remaining gain.  Mr Jones’ CGT liability on the sale of his property is nil.

However, suppose that Mr Jones was unsuccessful in selling his property in August and it takes until 7 May 2020 to sell his property. Under the new rules, Mr Jones will benefit from PRR for five years (being his period of occupation of the property) plus the last 9 months of ownership of the property (53% of the period of ownership).  Mr Jones will now be exempt from CGT on £42,400 of the gain.  The remaining £37,600 is not covered by PRR and there is no longer any lettings relief available because Mr Jones has never been in shared occupancy with his tenant.  This means that Mr Jones’ gain for CGT purposes will be £37,600.  Mr Jones’ CGT liability on the sale of his property will be £10,528 (assuming that all of his gain is taxed at 28% and he has used all his capital gains annual exemption elsewhere).

This represents an increased tax bill of £10,528 for Mr Jones following the changes.

Considerations for Landlords

The changes will be particularly relevant for property owners who are currently letting out their old home.

There may be cases where landlords consider selling their old home before these changes come into effect but the overall cost implications should be weighed up carefully.  In light of these changes, we would encourage any landlords who might be considering a sale to review their portfolios and get appropriate advice.

We have an experienced tax team who can advise on all aspects of tax on property, both residential and commercial. If you would like to discuss this or any other tax issues, then please get in touch.

If you are considering a sale of residential property, then please get in touch with our experienced residential property team.

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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