The death of lettings relief

The death of lettings relief

During the Budget 2018, Philip Hammond announced “we will limit Lettings Relief to properties where the owner is in shared occupancy with the tenant, and reduce the final period exemption from 18 months to 9 months”. Since then, we have been waiting on the draft Finance Bill to review how he planned for this limit to work and the effect this would have on people who have been letting their properties out prior to April 2020.

The draft Finance Bill was published last week and based on this, it is clear that for the vast majority of landlords selling rental properties after 5 April 2020, lettings relief will not be available.

Lettings Relief currently provides Capital Gains Tax relief where a property that has previously been the owner’s main residence, which has also been let is sold.  The relief is capped at £40,000 per owner and is subject to other restrictions.

Principal Private Residence (PPR) relief is the relief that prevents properties which have been occupied as the owner’s main residence for the entire period of ownership being subject to Capital Gains Tax.  Where in the final 18 months of ownership there has not been this occupation, currently the relief is still given for this period.  This period is being reduced to 9 months for sales after 5 April 2020.

What are the landlords losing?

Below is a comparison of a property sale with exchange on 31 March 2020 and 30 April 2020 and the difference that these changes make. In our example a married couple purchase a house on 1 April 1990 for £200,000 and lived there for 20 years.  At which point they moved out and began letting the property and it remains let until the property is sold for £500,000 in 2020.

31 March 2020 30 April 2020
Proceeds 500,000) 500,000)
Purchase (1 April 1990) (200,000) (200,000)
Gain 300,000) 300,000)
PPR – living in property until 31 March 2010 (20 years) (200,000) (199,445)
Final 18 months PPR (15,000)
Final 9 Months PPR (7,480)
Lettings relief (80,000)
Gain 5,000) 93,075)
Tax at 28% £1,400) £26,061)

In this scenario, if contracts are exchanged on 31 March 2020 the gain subject to tax is £5,000, likely covered by their annual exemptions, but if not the highest amount of Capital Gains Tax payable on this would be £1,400.  Alternatively, if the exchange of contracts is on 30 April 2020 then the gain is increased to £93,075, with potential Capital Gains Tax of £26,061.

This will not be an uncommon result of these changes with Lettings Relief itself being worth up to £22,400 for married couples.

Will anyone still qualify for Lettings Relief?

The limit on Lettings Relief means that you will only be entitled to the relief if during the letting period you also lived in the property as your main residence.  In this situation you likely qualified for full PPR relief under the current rules, and therefore the number of people claiming Lettings Relief is likely to be minimal going forward.

Is there anything I can do?

There are some options to try to obtain or “bank” the relief before April 2020.  These will be dependent on your exact circumstances, but could include accelerating plans to sell the property or making a gift or transfer of the property before April 2020.

If you have rental properties that you have previously lived in as your main residence then this change will affect you on the sale of the property and therefore we recommend reviewing your position now to see if any steps can be taken to mitigate this.

The legislation is currently draft and therefore may be subject to change.

David Tallon is a Tax Manager at Rickard Luckin Limited
Tel: 01702 606845