Posted: July 3, 2019
In recent years there have been various tax measures – such as restrictions on the tax deduction for mortgage interest or increased SDLT rates – that have worsened the tax position regarding investment properties. A further raft of changes are due to take effect from 5 April 2020 – that may mean that some tax payers consider that now is a good time to sell investment properties.
The changes due to take place from April 2020 include adjustments to what is known as ‘Lettings Relief’, a restriction on the periods qualifying for Principal Private Residence Relief and a change in the tax payment dates.
Here we review the potential impact of these changes by way of a case study based on an illustrative property purchase.
Illustrative Case Study
John and Susan purchase a property for £200,000 in April 2004 – they live in the property as their family home for the period from purchase up to April 2010. At that point they then purchase a larger property and use that as their family home. They let the property to various tenants on short hold tenancies from April 2010 to date. In late 2019 they decide to sell the property which is now worth £500,000.
Due to these changes the tax position changes depending on whether they exchange on the property before 5 April 2020.
Exchange Before 5 April 2020
The property will generate a gain of £300,000 – calculated based on the sale proceeds of £500,000 less the original purchase cost of £200,000.
Of the gain of £300,000 a proportion of this will be exempt due to the use of the property as a main residence (known as PPR). This is calculated on the occupation of the property – the property was occupied for a total of 6 years (2004 to 2010) as a main residence. In addition at the time the tax rules allowed an additional 18 month period. Therefore 7.5 years out of a total of 16 years (the total ownership period) are exempt – reducing the gain by £140,625.
After this deduction a further deduction for Lettings Relief was available – the calculation of this is somewhat complex but in many cases it generally means an additional deduction of £40,000 per owner – so £80,000 in this case.
Therefore the taxable gain is as set out below;
Total gain £300,000
Reduction for PPR Relief (£140,625)
Reduction for Lettings Relief (£80,000)
Taxable gain £79,375
CGT due at 28% £22,225
The tax due here will be due for payment by the 31 January 2021
Exchange After 5 April 2020
The starting position in terms of the initial gain will be the same as before – giving a gain of £300,000.
The general calculation of the PPR exemption will also stay broadly similar to the previous position – however the additional ‘bonus’ period of PPR will be reduced from 18 to 9 months. The PPR reduction will therefore be based on 6.75 years rather than 7.5 years – giving a figure of £126,563.
The major change however is the restriction in Lettings Relief – after April 2020 this will only apply where the owner continues to live in the property in a lodger / rent a room arrangement.
After the 5 April the calculation of the tax due will be as follows;
Total gain £300,000
Reduction for PPR Relief (£126,563)
Reduction for Lettings Relief (Nil)
Taxable gain £173,437
CGT due at 28% £48,562
The final change means that this tax will be payable within 30 days of sale – rather than 31 January 2021.
As you can see from the above there is a significant taxation saving (c£26,000) for a sale (exchange) occurring before the 5 April 2020. In addition to this there is also a substantially longer period to pay the tax due.
These tax changes mostly impact those selling properties occupied at some stage as a main residence. For properties solely owned as an investment the overall tax liability will not change after 5 April 2020 – although the payment date will be earlier.
Please contact Tom Saltmer at firstname.lastname@example.org should you have any queries regarding this issue.