Published: 21/11/2018 By Mark AddisonThe Budget recently attacked what is affectionately known in the tax trade as accidental landlords.
Individuals that lived in a flat and then met up with the love of their life and together purchased a bigger marital home sometimes chose to retain the old flat as an investment property to generate a small income and hopefully grow in capital value.
HMRC and the government have launched an attack on the principle private residence relief that has always been available to taxpayers to mitigate the taxable gain on properties that they have lived in previously as their main residence.
A few years back the HMRC restricted the final three year PPR exemption regardless of the use, to 18 months and now they are proposing to restrict further to only the final nine months covered by the PPR relief.
Another tax break for CGT on main residences has been the letting relief that is only available if a tax payer has as sometime occupied the property as his or her main residence. In a nutshell a gain on a property accrues evenly over the period of ownership regardless of perhaps the fact that the main increase in value may have occurred over a short period of time.
Therefore a gain of £100K over a ten year period would be seen as £10k per annum. So if you lived in the property for four years and rented it for six years then currently 5.5 years or 55% of the gain will be covered by PPR relief.
The letting relief provided further relief from the CGT because you had a further discount on the assessable gain that was the lower of the gain attributed to the letting period, the gain attributed to the PPR period or £40K.
So in the example given above the gain of £100K is discounted by PPR relief to the tune of £55K and letting relief of £40k leaving a chargeable gain of £5k that is further mitigated by the annual exemption for CGT of £11,700. Ie no taxable gain.
However the bad news is that the recent budget is proposing that letting relief is scrapped from April 2020 leading to a potential capital gains tax liability on the example given above of perhaps £11,400.
Therefore careful consideration is required as to whether you should sell or retain your investment properties.