As an owner-occupier, when you sell a property that’s your main home, Private Residence Relief (PRR) protects you from having to pay Capital Gains Tax (CGT) on any profit you make on the sale.
But what about selling a property that was once your home and you’ve been letting out? Or a property you had to hold onto longer than planned when you purchased a new home?
It’s not unusual to acquire a second property through circumstance – a bequest or a marriage for example, and the prolonged disposal of a property associated with a new home purchase can also lead to ownership (albeit temporarily) of two properties at the same time.
For people who find themselves in these situations, ancillary reliefs are available to help limit the CGT they have to pay when they come to sell.
From April 2020 however, two major changes to these ancillary reliefs will come into effect, and they have significant implications for anyone letting out or selling a property which was once their permanent private residence.
These changes were announced by the chancellor in the 2018 budget and are being introduced in an effort to better focus reliefs on owner-occupiers:
1. Restrictions to lettings relief
As things stand at the moment, when you come to sell a property that is – or was in the past your main residence – and which you have let out as residential accommodation, you can claim Lettings Relief up to £40k (£80k per couple) to reduce any CGT due on the sale.
From April 2020, in order to prevent individuals claiming Letting Relief on properties they may not have lived in for a long time, the relief is being restricted to those owners who are in shared occupancy with a tenant.
Note: This change won’t affect owner-occupiers or landlords who have never lived in the property they are renting out.
2. Reduction to final period exemption relief
Under current final period exemption rules, when you sell a property, you don’t have to pay CGT on gains made in the final 18 months of ownership – even if you were not an owner-occupier during that period.
This relief was originally introduced to protect taxpayers who might, for example, find themselves struggling to sell their old home, moving into a new property before the sale of their previous home was completed.
But the long exemption period means that more relief can accrue on two properties, and this outcome is not in line with the government’s original intention.
To correct things, from April 2020, the exemption period is being reduced to 9 months. It’s worth noting that even though the government is cutting the exemption period in half, 9 months is still twice as long as an average property transaction takes in the UK.
Note: Special rules apply to anyone who has to move into a care home, and people with a disability. Both groups will still be entitled to an exemption period of 36 months.
Should You Keep or Sell Your Second Property? It’s Decision Time!
These changes make no difference to professional landlords who wouldn’t have been able to claim the reliefs anyway. But if circumstances have led you to become an ‘accidental’ landlord and you’re currently letting out a property that was once your home, you need to take action now. You have to review your position and decide whether you will be financially better off keeping or disposing of the property.
What’s best for you will depend on your personal circumstances, but if selling is the best option, you can’t afford to delay: leaving things to the last minute will mean you will end up paying significantly more CGT than you need to if you sell after April 2020.
If you’re due to be affected by these upcoming changes, you need to take professional advice now. Inca can review your position and explain the financial implications as they will impact on you. We can set out your options and help guide you to make the decision that’s right for you.