Private Residence Relief and Lettings reliefs reductions 2020/21

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Simon Misiewicz

9th November 2018

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Article relevant to the tax year 2018/19 Private Residence Relief and Lettings reliefs reductions 2020/21

Reductions to Private Residence Relief and Lettings Relief for buy to let investors

In our previous article, we discussed the Capital Gains Tax (CGT) liability that will arise when you sell a buy to let property. We also wrote in that article of how you can avoid paying CGT at all. Given that we only wrote that article a month ago it is surprising how much the world changes so fast. Since the Autumn 2018 budget announcement was made, lettings relief has now been “diluted”.

Capital Gains Tax liability before the Autumn 2018 budget announcement

Prior to the Autumn 2018 budget announcement buy to let investors were allowed the last 18 months of ownership, tax-free. Someone that purchased a property on 1st January 2016 and sold it on 31st December 2018 would have owned the property for three years. I appreciate you could have worked that one out for yourself. If the owner lived out of the property from 1st January 2017 then they would have lived in the property for just one year. The remaining two years the property was rented out.

Due to the Private Residence Relief, the last 18 months of ownership would also be tax free as though they lived in the property for 2.5 years. This technically means the capital gains tax would be based on living in the property. As a result of the lettings relief then the 6 months the property was let out would also benefit from tax relief. We can see from the below example that the property owner would suffer no capital gains tax as a result of selling the property.

You can follow this example or work out your own Capital Gains Tax liability by using our very own calculator tool

£200,000 sales price

(£100,000) purchase price and capitalised refurbishment costs

£100,000 profit

(£83,333) Private Residence Relief

(£40,000) Lettings Relief

(£123,333) total reliefs

As you can see, the reliefs outweigh the capital gains and therefore no tax will be charged.

Reduction in PRR allowances after you have vacated the property.

Using this same example we need to take into account the increase in capital gains tax allowance from £11,700 to £12,000. This increase of capital gains tax allowance would provide a tax saving for high rate taxpayers of £84. As you can see, the HMRC was very generous, not!

One of the big changes was the reduction of deemed residence from 18 months as shown in the above example to 9 months. Again from the same example, it will be deemed that the person lived in the property for the first year plus nine months. This means that the person would be deemed to have lived in the property for 1 3/4 years. As such the amount of Private Residence Relief will also be reduced.

Let us see how much this change will have on a high rate taxpayer:

£200,000 sales price

(£100,000) purchase price and capitalised refurbishment costs

£100,000 profit

(£58,333) Private Residence Relief

(£40,000) Lettings Relief

(£98,333) total reliefs

£1,644 gains that become taxable.

If the high rate tax payer had used up his annual capital gains tax allowances then they would be taxed at 28% of this gain. This means that the buy to let landlord would pay £460.32 in tax.

Download your buy to let tax guide here, written by our property accountants

No more lettings relief will be available for buy to let property holders that did not live with the tenant.

An other significant change was the amendment to the lettings relief. The government have now said from April 2020 that lettings relief will only be provided if you, the owner, lived with the tenant. Please remember that you can earn £7,500 tax-free for a tenant living in your property.

Let us see how much of an impact the removal of Lettings Relief will have on the above example

£200,000 sales price

(£100,000) purchase price and capitalised refurbishment costs

£100,000 profit

(£58,333) Private Residence Relief

£41,667 gains that become taxable.

As a high rate taxpayer that has used up their annual capital gains tax allowances, they will be tax at 28%, £11,666.76

We are not clear from HMRC if the removal of lettings relief affects that the tenant lived in the property without you before April 2020.

Our property accountants and property tax advisors are always on hand to help our clients. The sole aim is to build their wealth whilst paying less tax on their buy to let portfolios.

Conclusion

It may be sensible to sell sooner rather than later if you are looking to sell your buy to let property. Given the tax changes it may also be worthwhile thinking of taking in a lodger to earn the £7,500 tax free money. This also helps you to keep the Lettings Relief as outlined above.

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