Landlords warned about £40k tax charge

Landlords warned about £40k tax charge

Property owners who have a second home rented out could be £40,000 worse off following changes to the lettings relief rules. 

Under the previous rules, an individual who let a property to a tenant, rather than leave it empty, could claim up to £40,000 in capital gains tax relief when they came to sell the property. 

This was introduced in the subdued housing market of the 1980s to encourage individuals to rent out spare rooms in their homes. But it was soon used by people who were renting out properties they owned but did not live in, as long as it was declared as their primary residence. 

From April 2020, this will no longer be the case, and an individual must actually be living in the property at the time of the sale or they cannot claim the relief.

The rule allowed individuals to claim tax relief initially on the number of years they owned the property, which is called private residence relief, and then on top of it claim up to £40,000 in what is called lettings relief. 

For example, if a house is sold with a profit of £150,000, the first task is to work out how much of the gain happened when the individual lived in the property, and then the gain made during the period when the property was let and declared as a primary residence.

The current rule is that lettings relief is the lower of those numbers and £40,000. 

The proposed change is that lettings relief will only be available from April 2020 where the owner is in shared occupancy with the tenant, and the £40,000 allowance abolished where they are not. 

Nimesh Shah, a partner at Blick Rothenberg, said: "Currently, there is no need for the owner to live in the property so they could move out, rent their home and benefit from the relief. 

"The original consultation document noted that ‘lettings relief’ was introduced in the 1980s to encourage people to rent out spare rooms in their homes, without it affecting main residence relief. 

"It has taken HMRC and the government close to 40 years to conclude that the rules, as originally designed, did not achieve that purpose and are now acting to make the change.

"I am somewhat sceptical that this is the real reason for the change, and the rule change makes it clear that the government want to restrict its availability. In my view, it would have been far simpler to abolish the relief completely."

He said the government expects to raise £470m in additional tax from changes to the capital gains tax treatment of property.