The government’s changes to capital gains tax is likely to hurt second home owners and small landlords, experts have said.
In the Finance Bill 2019-20, published yesterday (July 11), the government confirmed a shift in capital gains tax rules limiting the extra amount of private residence relief second home owners are entitled to, as previously announced in Budget 2018.
Private residence relief is a reduction in capital gains tax and includes circumstances where the individual originally lived in the property then kept it as a rental after moving to a new home.
Under the existing rules, the exemption is the time spent living in the property plus another 18 months of relief.
For example, if someone owned a property for 13 years but only lived in it for six, they would receive seven and a half years of exemption (six years plus the 18 months).
This is worked out as a percentage of the price the property was sold for and this part is tax exempt.
But the government’s changes will limit the ‘extra relief’ to nine months.
Although seemingly a small change, Gordon Andrews, tax and financial planning expert at Quilter, said affected individuals would spend thousands of pounds in additional tax.
He said: "The government expects to net an additional £470m over the next five years in additional tax revenues as a result of this change.
"It means that owning a second home becomes slightly less profitable for those that rent out a property they previously lived in."
Mr Andrews said it was fairly common for individuals to try and hold on to a property when they move into a family home in the hope to profit from rising house prices but that these changes made that "slightly less attractive".
The rule shake up will benefit married couples, however, as a spouse or civil partner can now inherit the relief.
Previously, a spouse who inherited a home would not be entitled to the relief unless they personally lived in the property.
Under the new rules, the relief their partner would have received is now transferable.
The changes are one in a string of tax shake ups that have hurt landlords, following the introduction of an additional 3 per cent stamp duty surcharge on second homes and cuts to mortgage interest tax relief.
The government also confirmed yesterday that about 170,000 self-employed workers will pay more in tax from April 2020, as the government is expanding the off-payroll working rules, known as IR35, to the private sector.
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