All Around the Houses, Once Again!
In our last blog on this topic, we looked at what can happen when you think that the house you’ve sold at a gain is tax-free and you get it wrong.
Normally when you live in a house that you own, selling it with a gain will usually be tax-free and this tax relief is called Principal Private Residence relief. However, there are further tax traps now on the way.
We are telling you about these now because there’s a consultation period about this until June this year.
So, What are These New Traps Being Set?
Firstly, at present, the last 18 months of ownership is always disregarded for tax as long as you’ve lived in the house at some time as your Principal Private Residence. Under the new proposed rules, this period will be reduced to 9 months.
Put simply, if you owned your house for 7 years and 9 months and lived in it for the first 4 years only, the tax-exempt period will become 4 years and 9 months instead of currently 5 years and 3 months. Therefore nearly 39% of the gain (36 months out of 93 months) would be taxable.
On a house selling at a large capital gain, the extra tax at 28% could be significant. For example, using the situation above, if the gain on sale is £200,000 the tax bill could increase by say £3,612 just by exchanging contracts on 6 April 2020 instead of 5 April 2020.
There Are a Few Exceptions Planned
We should add though that the present 36-month exemption period will be retained for disabled owners or those who live in residential care.
Secondly, if you presently have let the house out as well as living in it, you can reduce your gain further by claiming “lettings relief”. This relief is worth up to £40,000 off the capital gain amount. At 28% this was a tax saving of up to £11,200!
Under proposed changes, you will only be able to claim this extra “lettings relief” if you lived in the house at the same time as your tenant. However, if you live in your house as your main home, that period is covered anyway by the existing Principal Private Residence tax relief. We can only assume that this new arrangement only applies when you do not live there as your main residence.
Homeowners who move and then let out their former home could be significantly hit by this change in capital gains tax relief. It seems to us this is another attempt to discourage private landlords wishing to let out residential property, coinciding also with reduced tax reliefs on mortgage interest.
These Are “Coming Soon”
These two significant changes to capital gains tax are due to come into effect from 6 April 2020.
If you are contemplating selling your house next year, it may be wise to exchange contracts before the new changes are introduced. The tax reliefs surrounding residential property ownership are complex and if you would like to have more detailed information and advice, please do call us.