The ATT is warning landlords who have previously lived in the property they let that, if changes to letting relief proposed last year are included in this year’s Finance Bill, the measures could increase their capital gains tax bill on a sale by up to £11,200 overnight. This has led the ATT to call for transitional measures to avoid this cliff edge.1
Until 5 April 2020, letting relief is available to individuals who have lived in a property at some point during their ownership, but then move out and let the property. The relief can cover up to a maximum of £40,000 of gains arising during let periods.
If the proposed changes released in draft form last year2 are implemented, from 6 April 2020 letting relief will only be available where the homeowner and the tenant are occupying the property at the same time – so called shared occupation. Under the draft legislation, the requirement for shared occupation will apply not only to future lettings but also any let periods prior to 6 April 2020. This means that many people who let properties after they moved out will lose any relief they would have been entitled to for those let periods, and will have little or no time to take action to preserve it.
Michael Steed, Co-Chair of the ATT’s Technical Steering Group, said:
“Someone who was entitled to the maximum letting relief under the old rules, but sells on 6 April 2020, could be up to £11,2003 worse off than if they had sold a day earlier on 5 April 2020. At the same time, they will also be subject to new rules - which have already been legislated - requiring them to pay that tax much earlier than they would have previously.4
“We recommend that if the shared occupation change to lettings relief goes ahead, any entitlement built up under the old rules should be frozen and preserved at 5 April 2020, with the new conditions only applying to let periods after that date. This should help to avoid the cliff edge effect and avoid the retroactive effect of the policy.”
Notes for editors
- The ATT’s full budget representation can be found here.
- On 11 July 2019, draft Finance Bill 2019-20 legislation was published, including ‘Changes to ancillary reliefs in Capital Gains Tax Private Residence Relief’ which includes the letting relief changes noted above.
- The maximum additional potential tax is the higher rate of tax on residential disposals of 28 per cent multiplied by the maximum possible relief of £40,000 = £11,200. If the property is jointly owned, and both owners are higher rate taxpayers who have accrued the maximum relief, this could increase the tax bill for the couple by £22,400 overnight.
- From 6 April 2020, any disposal of residential property by a UK resident which results in tax being payable will come within new reporting rules requiring the disposal to be reported to HMRC – and any tax paid – within 30 days of completion. This is a measure likely to affect landlords and second home owners in particular.