Capital Gains Tax to Increase on Rental Property Sales

08 November 2018

The latest budget announcement by the UK Government reveals plans to increase the amount of Capital Gains Tax that landlords need to pay on the sale of rental properties that they have previously used as their main residence. The budget also reduces the length of time that an owner has to sell if they have had to move out. These changes will apply from April 2020.

Will I Be Liable For Capital Gains Tax on My Property Sale?

Whether or not you will need to pay Capital Gains Tax (CGT) when you sell your property will depend on how you have used the property. If you are selling a property that is your main residence (and has been since you bought it) then you won't need to pay CGT on the profit you have made. This is because of a tax relief called Private Residence Relief (PRR) also known as Principal Private Residence Relief (PPR).

However, if you are selling a property that you have either moved out of before selling or that you have been renting out then you could be liable for CGT, even if you previously lived there. What's more is that the amount of CGT payable on these types of rental properties is set to increase following the latest budget announcement.

The new rules will now apply to any property that has been rented out where the seller also used it as their main residence for a time before they began renting it. As a result, these changes could impact those individuals who never intended to be landlords, but have had to rent their home out due to a change in circumstances such as relocating for work or a relationship breakdown.

Updates to Capital Gains Tax on Property Sales

In the recent budget announcement, two changes were announced that will impact on the amount of CGT charged on the sale of rental properties that have also been used as a main residence.

Currently property owners are exempt from CGT during any years of ownership when they lived in the property. There is also an exemption for the last 18 months of ownership, regardless of whether or not you were living in the property at this time. This means that people who have had to move out of their home before selling may be exempt completely, providing that they sell within 18 months of moving out. Anyone moving into residential care or disabled owners moving before a sale completes will be given a 36 month exemption.

Under the new rules, this 18 month exemption is being halved to just 9 months, meaning that those individuals will have to sell much sooner after moving out if they are going to avoid a CGT bill. The 36 month retention for the disabled or those moving into care has been retained.

When a property has been rented out at any timeeach homeowner is currently entitled to up to £40,000 'lettings relief' if they are renting out a property which has previously been their main residence. For couples who own a property jointly, this relief can be applied twice to a total value of £80,000.

Under the new rules, lettings relief can only be claimed by a homeowner for the period when they have lived in the home alongside their tenant (or tenants).

What this means in practice is that individuals who own a property which they lived in for a time, and then later rented out, could be liable to much higher CGT when they sell up. The Treasury says that the intention of this move is to focus the benefit of these tax reliefson owner-occupiers, as opposed to landlords who have been letting out their entire property and living elsewhere.

Landlords who have never lived in their rental property will not be affected by these changes, as they would not have been eligible for either PRR or lettings relief under the current rules.

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