By now all landlords should be very aware of the changes to the way in which tax relief is given on mortgage and other interest associated with property rentals, however according to Tax Director Faye Howard, there are further changes planned for April next year to some other reliefs which could potentially have a bigger effect.
Many landlords have properties which have at some point been their only or main residence, and this provides them with an important tax relief when the property comes to be sold called Principal Private Residence (PPR) Relief. Currently, PPR Relief is available to exempt any gains relating to any periods of actual occupation of the property, any periods of ‘deemed occupation’, and the final 18 months of ownership. This final 18 months of ownership has already been reduced from 36 months for property disposals after 6 April 2014, but from 6 April 2020, it will be reduced further to just 9 months.
Whilst the reduction in the final period of PPR Relief is likely to be a relatively minor annoyance to most landlords, the proposed removal of Lettings Relief from 6 April 2020 is possibly rather more of an issue.
Lettings Relief is available where a property is sold which has been let, but which also at some point during the vendor’s period of ownership was their Principal Private Residence. This provision was initially intended to give tax relief on the sale of a property which had been shared with tenants throughout periods of ownership, but it evolved to exempt potentially significant portions of gains where the whole property was let. Whilst there are restrictions on the amount of Lettings Relief that can be claimed on a disposal, the maximum claim can exempt up to £40,000 of gains per person, or £80,000 per couple where the property is in joint ownership. Assuming a maximum Lettings Relief claim, this Relief is worth £22,400 of Capital Gains Tax.
With the withdrawal of this relief just around the corner, any landlords who might qualify for Lettings Relief would be well advised to quantify the value of this relief and the effect its withdrawal may have. This is an exercise we have undertaken for a number of clients, with some surprising results.
One way to trigger this relief is to sell a property before 6 April 2020, however this may not be desirable, or even possible for many landlords. There are other options however which will crystallise the gain and trigger the relief, although options may be more limited where the property is mortgaged. We are however happy to advise on these situations, and help you come to a decision as to the best way forward for you.
Should it not be possible to crystallise the gain and bank the relief, there are investment options which allow deferral of capital gains, but on the other hand, landlords looking to sell may benefit from some advice on alternative investment strategies, and this is something our IFA colleagues can assist with.