Significant changes on disposal of rental property

Deemed Residency

HMRC have previously recognised that there may be situations where a property owner might struggle to sell their house when purchasing a new one.  They, therefore, allow a period of deemed residency prior to sale to be added to the period of Principal Private Residency (PPR) when calculating capital gains tax.  Back in 2014 this was reduced from 3 years to 18 months and is set to reduce further on 6 April 2020 to 9 months.  This also has a knock-on effect for people who let out their property as they can also have the deemed residency if the property is rented out in the period prior to sale if it has been their PPR at some point.

Lettings Relief

Lettings Relief is the lower of £40,000, PPR relief or the gain made for the period the property is rented out. As of 6 April 2020, the rule is set to change to say that the taxpayer must be living in the property at the same time to receive Lettings Relief.  This is going to affect most people with rental properties and can have a significant impact for tax.

Just looking at a quick example, someone who has owned a property for 10 years; lived in it for 5 years and rented it out for 5 years.  The property is bought for £100,000 and is sold for £150,000.  If the property is sold pre and post 6 April 2020 the gain would be calculated as follows:

Pre 5 April 2020 Post 5 April 2020
Less Cost(100,000) (100,000)
PPR relief
(50,000 / total ownership x residency)
(32,500) (28,750)
Letting relief
(50,000 / total ownership x time let)
Gain after relief021,250
Annual Exemption(12,000)(12,000)
Chargeable gain09,250
Tax charge**02,590

The annual exemption for 2020/21 has been estimated at the same amount as 2019/20

**assumed higher rate tax of 28% for residential properties

Property residency
  Pre 5 April Post 5 April
Months for PPR 60 60
Months for Lettings Relief 42 0
Deemed Residency 18 9
Total ownership 120 120

As you can see from the above, a few days can make a significant difference to your tax bill.  Should your intention be to sell the property, but you are unable to do this before 6 April 2020 then you may want to think about other ways of mitigating tax. 

There are a few things that you can do, should the property become your main residence again then you are able to include 3 years of non-residency as deemed residency for the PPR calculation.  In the example above this would leave a chargeable gain of only £2,500 which is below the Annual Exemption and no capital gains tax will be due.

Please also note that should there be a chargeable gain on a UK Residential Property form 6 April 2020, there is an obligation to report the gain to HMRC and pay any Capital Gains Tax due within 30 days.  The above proposed changes will not apply to furnished holiday lets.

We would, therefore, recommend that you always seek tax advice prior to selling your rental properties.

The above is based on draft legislation which is open to comment until 5 September 2019.

If you would like to discuss this blog in more detail please email Robert Hadden or call 01772 821 021.