Recent tax changes to be aware of if you have a rental property
There has been a trend in recent years of the government changing legislation to get more tax out of those who own more than one property. Changes to stamp duty and income tax have made it much less profitable to let properties but from April 2020 the government will be making changes to capital gains tax that will again target landlords.
What is capital gains tax?
For those unfamiliar with capital gains tax, it’s a tax that you have to pay when you sell something for more than you paid for it so it’s most commonly paid on the sale of property or shares. There’s no capital gains tax to pay on properties that you lived in for the entire time you owned it and you’ll also get an annual allowance so the first £12,000 (in 2019/20) of gains won’t be taxable so many people never pay CGT.
What’s changing?
Many people become landlords by either buying a new property or moving in with a partner and letting out their old home rather than selling it so that it serves as an investment and potential income stream. As it stands, if you’ve lived in a property and then let it out, you’ll get a relief for all or part of the gain in value on the property during the time that you let it out but that’s all about to change. From April 2020, you’ll no longer be able to claim lettings relief so any gain in value during the period where the property wasn’t your main residence will be subject to capital gains tax. Up to April 2020, you can claim up to £40,000 in lettings relief so this can make a significant difference to the eventual capital gains tax owed.
There is also currently an exemption for the last 18 months prior to the sale so if you lived in a property for 2 years then let it out for 2 further years, you’d only be liable to capital gains tax on 6 months (18%) of the gain. From April 2020, this is going to be reduced to 9 months so in the same scenario 15 months (31%) of the gain would be taxable.
Example:
You buy a house with your partner for £200k, live in it for 5 years, let it out for a further 5 years then sell it for £400k.
Prior to April 2020 the £200k gain would be reduced by:
• 5 years of living in the property -£100k
• Your personal capital gains tax allowance -£12k
• Your partner’s personal capital gains tax allowance -£12k
• Exemption for 18 months prior to sale -£30k
• Lettings relief -£40k
Leaving £6k of taxable gain on the property so you’d pay £840 each (assuming you’re both higher rate tax payers).
After April 2020 the £200k gain would be reduced by:
• 5 years of living in the property -£100k
• Your personal capital gains tax allowance -£12k
• Your partner’s personal capital gains tax allowance -£12k
• Exemption for 9 months prior to sale -£15k
Leaving £51k of taxable gain on the property so you’d pay £7,140 each (assuming you’re both higher rate tax payers).
Will it affect me?
With this in mind, it might make sense for some landlords to sell their properties prior to April 2020. To figure out if this will significantly impact you, complete the online capital gains tax calculator, set the sale date to today and make sure you select No when it asks if you’re entitled to letting relief. If HMRC says that there would be capital gains tax to pay then it might be worth looking into selling the property or at least having a more in-depth conversation with us.