To Sell Or Not To Sell? Capital Gains Tax Changes
The October 2018 budget brought even more changes for landlords, with the latest attack on landlords focused on the sale of rental properties and Capital Gains Tax. So if you are thinking of cashing in, the question is to sell or not to sell?
There have, historically, been some very generous reliefs. However, from 6th April 2020, there are some changes that are going to make them a bit less favourable, so if you are already planning to sell you need to give some serious thought as to when.
Private Residence Relief
What is it?
Private residence relief is one of the widest know capital reliefs and one that will apply at some point to nearly all property owners.
If you have lived in a property for the whole of the time that you have owned it, this will apply to 100% of the gain – which is why you would not pay capital gains tax.
However, when you sell a rental property, capital gains tax will potentially be due on any gain.
If you have lived in the property for only part of the time that you have owned it and then move out of the property, you will get private residence relief for the period of time you lived there.
You also usually get private residence relief for the last 18 months regardless of whether you are living in the property during this period.
As with private lettings relief (outlined below), this relief can reduce or cancel out a gain but cannot create a capital loss.
The private residence relief that applies for the last 18 months will be reduced to 9 months where the owner has lived in the rental property but no longer does.
Private Lettings Relief
What is it?
Private lettings relief is a capital gains tax relief that can be claimed when you sell a rental property. It is calculated as the lower of three figures:
- Private residence relief
- The gain while the property has been let out that is not covered by private residence relief.
While this relief cannot create a capital loss, it can be very effective in reducing the capital gain where there has been a period where the property has been your main residence.
There are lots of circumstances in which this happens.
You could be a couple who have moved in together but kept one of your previous homes to rent out or you could have tried to sell your home, but, unable to find a buyer decided to let it out instead.
Or it could be your first home that you kept on as an income stream after moving up the property ladder – in short, it is something that happens a lot.
Where a property is jointly owned, and the property has previously been a main residence for both owners (as would commonly be the case for married couples) this relief can effectively be applied twice giving up to £80,000 in private lettings relief.
In short, in the majority of cases, it won’t apply after 6th April 2020. The very limited circumstance where it is being retained, is where the owner lives with the tenant at the property.
This is potentially going to be the biggest loss for landlords that have previously lived in the rental property they let out.
Entrepreneurs Relief for Capital Gains Tax Purposes
What is it?
Entrepreneurs Relief is a relief that can allow the capital gains tax rate to be reduced to 10% from a rate that could be as high as 28% on residential properties.
For landlords, this is only applicable where the property in question is a qualifying furnished holiday let.
Furnished holiday lets are appearing to become more popular as the new mortgage interest changes are being introduced as they are not affected by them.
To be a qualifying furnished holiday let, apart from the fact the property should obviously be furnished, the conditions are as follows:
- The property should be available for letting for a minimum of 210 days per tax year (or for the first 12 months of let in the first year.)
- The property should actually be let for a minimum of 105 days.
- The let period should be made up of short-term lets.
A short term let is one of 31 continuous days or less. These longer term lets can’t exceed 155 days and do not count towards the days for point two (above).
One of the conditions for Entrepreneurs Relief is you must have owned the property for the past year and met the conditions of a qualifying furnished holiday let.
This is what is referred to as the minimum holding period.
The minimum holding period is increasing to two years. This is also important to note when selling any shares where you may be able to benefit from Entrepreneurs relief.
If you are already planning on selling a rental property that you have previously lived in, it may be more tax efficient to sell the property prior to the changes on 6th April 2020.
If you are disposing of multiple properties that may be affected by these changes, it may be effective to plan this over the 2018/19 tax year and the 2019/20 tax year to ensure the maximum use of annual exemptions.
To ensure this is correctly planned, it is important to obtain professional advice.
If you are looking to sell a furnished holiday let, you should note the qualifying period for Entrepreneurs relief if you are looking to make a claim and benefit from this.
For any of your property tax needs, please do not hesitate to contact RITA4Rent today on Freephone 0800 1 22 33 57 or via email by clicking here.
- We recommend all professional landlords protect themselves and their business by gaining access to advice, information and education from a landlord association. Become a member of the Residential Landlords Association (RLA) today and join over 35,000 other landlords, just like you. Click here to become a member of the RLA today.
- Given the sheer level of tax changes in recent years, it might also be a good time to review your mortgage position. Please note we are not authorised to provide advice or arrange mortgages but we can introduce you to a firm who can. If you wish to discuss your policies or receive advice then please contact us and we will pass your details onto RLA Mortgages who are authorised and specialise within this area.
- propertychecklists.co.uk has been set up by Which? property author Kate Faulkner and offers checklists on everything from how to choose a buy to let through to securing tenants, letting them go and day-to-day management. If you have a question and want an independent answer, they will also help with that too – all free of charge!
- Finally, it can also be a great help communicating with like-minded landlords, learning about their experiences, and having a chat. You can do just that by heading over to Property Tribes today, the busiest forum for private and residential landlords in the UK.