Why you might not want to further delay the sale of a rental property
If you continue to hold off selling a rental property which you have previously lived in due to concerns about uncertainty on Brexit, you may want to think again and put the property on the market as soon as you can in the new year. If you don’t sell soon, proposed changes to the law on lettings relief, principal private residence relief and the timing of payments of capital gains tax which are due to come into force from the 6 April 2020 may end up costing you a lot more in tax.
The upcoming changes are best explained by some worked examples – one which explains the tax calculation if the sale takes place this tax year and another if the sale takes place in the next tax year after the changes come into force.
Example 1 – Sale in the 19/20 tax year
Let’s take an example where an individual purchased a house for £200,000 on 1 January 2000 and then sold it for £500,000 on 31 December 2019. During their 20 year (240 month) ownership they:
- Lived in the house as their only residence for 15 years (180 months), following which they moved out; and then
- Let the entire property for five years (60 months) before selling it.
The net gain is £300,000.
PPR on CGT payable
Currently, PPR will be available for the period the property was occupied as the individual’s main home, which is 180/240 months, in addition to the last 18 months regardless of whether they were actually living there during this last 18 month period. Therefore 198 of the 240 months would currently be eligible for PPR.
£247,500 is therefore eligible for PPR – i.e. (198 ÷ 240) x 300,000.
This would leave a potential gain liable to CGT of £52,500.
Lettings Relief on CGT payable
Currently, lettings relief would also apply to the chargeable gain (£52,500), which is the lowest of:
- The amount of PPR (£247,500);
- The gain attributable to the letting (£52,500); or
As such, the chargeable gain of £52,500 could be reduced by a further £40,000 to £12,500. Then after the deduction of the CGT annual allowance of £12,000 for this 19/20 tax year only £500 would be subject to capital gains tax, which at the higher rate of 28% would mean CGT of just £140.
If the individual already completed self-assessment tax returns then the CGT would need to be paid by 31 January after the end of the tax year of sale i.e. 31 January 2021.
Three changes are due to come in for sales or transfers from the 6 April 2020:
- Firstly, the final 18 months which currently can be added to the PPR as per Example 1 above is reducing to 9 months.
- Secondly, lettings relief will only be applicable if the seller was in shared occupation with the tenant during the time letting relief is being applied, and will therefore not be available for those periods where an owner has moved out of the property and therefore no longer shares occupation with the tenant or tenants.
- Thirdly, for disposals of residential property after 5 April 2020, the CGT would need to be paid within 30 days from the date of completion.
Example 2 – Sale in the 20/21 tax year
Using the same facts as Example 1 above except for the date of sale, as a result of the upcoming changes:
- the gain eligible for PPR would reduce slightly to £236,250 – i.e. (189 ÷ 240) x 300,000;
- lettings relief would not be available.
Therefore, after the deduction of the annual exemption of £12,000 (assuming this remains the same for the next tax year 2020/21), the taxable gain would be £51,750 (i.e. £300,000 – £236,250 – £12,000) meaning a possible CGT bill of £14,490 (i.e. £51,750 x 28%). This would need to be paid within 30 days of the date of completion so, if the property sale completed on 1 May 2020, the CGT bill of £14,490 would need to be paid by 31 May 2020.