With the December general election and Brexit chaos grabbing the headlines in recent months, it’s easy to see how potentially significant changes to capital gains tax have been brushed under the carpet.
Arguably the biggest of those proposed changes, which are due to come in from 6 April 2020, will affect people who live in one property while renting out another, for example, accidental landlords.
If they sell that rental property once 2020/21 gets under way, they will lose a valuable tax break that currently reduces their capital gains tax bill. What are we talking about? Letting relief.
Until 5 April 2020, private residence relief can be claimed on your former main residence for the time you lived there plus the last 18 months of ownership. Letting relief of up to £40,000 can be claimed for when you rented out the property.
Letting relief is currently whichever is the lower of the amount of private residence relief, the chargeable gain you made from letting out the property, or £40,000. That exemption doubles to £80,000 for couples.
From 6 April 2020, the proposed change – which still needs to be written into any upcoming Finance Act to make it law – will see letting relief only available to owners who shared their home with a tenant.
How does letting relief work in 2019/20?
You owned a flat in Clifton that you lived in for 10 years. You then met your partner and moved in with them. For the last 10 years you have been renting your flat. You chose to sell the flat in October 2019 for a £150,000 profit, or gain.
In 2019/20, you can get private residence relief for ten years and the final 18 months before the sale was completed, protecting 57.5% – £86,250 – of your profit from the flat’s sale.
The remaining 42.5% – or £63,750 of the profit – was liable for capital gains tax and at this point, letting relief of £40,000 kicked in to reduce your capital gains liability to £23,750.
As of the point of sale, you hadn’t used your capital gains tax allowance of £12,000 which means you paid 28% tax (£3,290) on the remaining profit (£11,750).
As you sold the property in October 2019, you have until midnight on 31 January 2021 – around 15 months – to report and pay your tax to HMRC through self-assessment.
How does letting relief work in 2020/21?
Having a capital gains tax bill of £140 from the sale of your Clifton flat is a pretty good result, but it would be a very different outcome if you were to delay the sale by six months and complete the deal in July 2020.
Let’s fast forward to that point in time. As you’ve lived with your partner for the last 10 years, you would lose your entitlement to letting relief that could have reduced your capital gains tax bill by £40,000 if selling in 2019/20.
One of the other changes to capital gains tax due to kick in from 6 April 2020 has also halved the private residence relief final-period exemption from 18 months to nine.
In 2020/21, you can get private residence relief for five years and the final nine months before the sale was completed, protecting 57.5% – £86,250 – of your profit from the flat’s sale.
The remaining 32.5% – or £63,750 – is liable for capital gains tax. Assuming the £12,000 capital gains tax allowance remains in place and unused for 2020/21, £61,750 is your chargeable gain at 28%. Your tax bill soars to £17,290.
What’s more, from April 2020, you have just 30 days after completing the sale of your flat to submit a residential property capital gains tax return and pay any tax you owe.
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Capital gains tax is already complex enough, even before these proposed changes come in from April. Fortunately, you’re in safe hands with Dunkley’s.