Capital Gains tax hike and the accidental landlord

The government’s forthcoming changes to property sales capital gains tax rules will be expensive for anyone who’s inherited their family home, or relocated or moved in with a partner but kept their original home as a safeguard or investment.

Until now, someone who becomes a landlord “by accident” by renting out their old home as an alternative to selling it when they moved on, has received tax relief when they eventually sell the property. But this relief is due to be axed a year from now in a bid to raise £470 million for the Treasury over five years.

The new tax bills will cost these “accidental” landlords thousands of pounds once the new rules come into play – meaning that people now face the choice of trying to sell quickly while they can escape the charge or contending with the prospect of charges such as exit fees, for example, if they sell properties early when they’re on a fixed mortgage.

Property experts predict a rush of house sales over the next year as landlords try to escape the buy-to-let market before the April 2020 deadline, and this could lead to property prices falling further.

This is how the tax changes will work…

Everyone has a capital gains tax allowance of £12,000 a year. If you make any profit above £12k, there’s tax to pay.  A basic-rate taxpayer would pay 18% in tax on the gain. A higher-rate taxpayer would have to pay 28%.

Let’s say you bought a property for £200,000 with the intention of renting it out. You then sold it for £300,000 making a profit of £100,000 – so you would have to pay tax on that £100k gain – the difference from when you bought it to when you sold it.

But if you rent out a property that was once your main home, you only have to pay tax on the amount it went up in value since you left.  And currently, for tax purposes, landlords can add an extra 18 months on to the amount of time they lived at the property. So let’s say you’ve owned a house for twenty years and you lived in it for ten years then rented it out to tenants for ten years, you can state on your tax bill that you lived there for 11.5 years.

But from next April the 18 months will be halved to nine months, increasing the taxable time.

Further changes include a reduction in “lettings relief” that will hit couples by up to £80,000.

If you’re a landlord with concerns about the proposed changes to property-based capital gains tax, give us a call and we’ll be happy to chat through your options.

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