Capital Gains Tax Changes For Buy To Let Landlords

Rent a Room Relief

This generous scheme currently provides an exemption from tax of gross rents up to £7,500 where rooms within the taxpayers’ main residence are rented out.

Previously HMRC carried out a review of rent a room relief. It was proposed that the relief would be restricted to situations where the taxpayer was resident for at least part of the time when the “lodger” was paying rent.

This was proposed because HMRC were concerned that the relief was being “abused” by letting out the entire property using websites such as Airbnb and living elsewhere temporarily, whilst the tenants were in the property. An example would be renting out a house in south London during Wimbledon fortnight and potentially receiving up to £7,500 tax free.

After consultation, it was announced in the Autumn Budget that the proposed restriction was not now being introduced.


Changes to CGT Private Residence Relief

Consultation has just completed on two changes which could affect the capital gains tax paid by buy to let owners.

Final period exemption to be reduced

The final period exemption was for a long time; three years and was always intended to cover situations where the taxpayer was “bridging” and waiting to sell their previous residence.

However, 36 months was felt to be too generous and was allegedly being abused by a strategy known as “second home flipping”. As a result, the final period relief was restricted to the current 18-month period of deemed occupation a few years ago.

The current position effective from April 2020, is to restrict further to 9 months although it will remain at 36 months for those with a disability, and those in or moving into care.

This will mean an additional 9 months (from 18 months) will be chargeable to Capital Gains Tax on disposal of the property.


Lettings Relief Changes

Lettings relief currently provides a further exemption for capital gains of up to £40,000 per property owner (£80,000 available if joint owners) where you have also resided in the property as your principle private residence.

The additional relief was introduced in 1980 to ensure people could let out spare rooms within their property on a casual basis without losing the benefit of PRR, for example where there are a number of lodgers sharing the property with the owner.

In practice, lettings relief extends much further than the original policy intention and also benefits those who let out a whole dwelling that has at some stage been their main residence. It is those situations that the government appear to be attacking under the new changes.

Depending on the length of time of letting vs residency, and the capital growth of the property, the loss of this relief could cost a higher rate couple who jointly own a property, an extra £22,400 in capital gains tax.

Note that those who are renting their property temporarily whilst working elsewhere in the UK or working abroad are unlikely to be affected by this change as there are alternative reliefs available under those circumstances.

Please check with us if you are likely to be affected by these changes as it may be worth considering disposing of the property before the new rules are introduced from 6 April 2020.


Picture credit –