Beware the disappearance of letting relief

Helen Thornley

Helen Thornley

People with a property which for some periods has been their main home while at other times they have let it out, could be in for an unwelcome shock if they dispose of it on or after 6 April 2020 because of major changes to letting relief.

The measures were proposed by the government last year and could increase the capital gains tax for some homeowners by up to £11,200 overnight.

Currently, letting relief is available where an individual sells a property which has been their main home at some point during their ownership and which they have let out for other periods.

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It is not uncommon for people to buy a house, live in it, then move out and let it – either by choice or because they have struggled to sell.

Under the new proposals, letting relief will only be available where the homeowner and their tenant are in occupation of the property at the same time - shared occupation.

Under the draft legislation published last year the requirement for shared occupation will apply not only to future lettings but also any let periods before 6 April 2020.

This means that people who have let properties after they moved out will lose the relief that they would have been entitled to for those letting periods. In effect, the change is retroactive.

This change to how property sales are taxed is unfair, both because of the retroactive impact and because of the sudden impact of the change.

It is very disappointing that no transitional measures are in place, either, considering letting relief has been around for 40 years.

In advance of the spring 2020 Budget, we have written to the government to appeal for any entitlement to letting relief built up under the old rules to be frozen and preserved at 5 April 2020 with the new requirement for shared occupation only applying to let periods after that date.

This will help to avoid the retroactive effect of the policy and the cliff-edge impact on tax bills.

Financial limits

It is worth noting that, as it stands, letting relief is already subject to financial limits.

The amount of gain that can be relieved is limited to the lower of three figures – an absolute limit of £40,000, the amount of private residence relief that the individual is entitled to, or the amount of the gain calculated to have arisen during the letting periods.

This means that those who have not lived in the property for much of their ownership, or only let the property for a short time, are already entitled to less than the maximum possible relief of £40,000.

By contrast, the effect of the change on 6 April 2020 could be substantial for those who have already built up an entitlement to the maximum amount of relief.

For a basic rate taxpayer, who pays tax on residential property disposals at a rate of 18 per cent, the relief on £40,000 of gains is worth £7,200.