To sell or to let? Beware the CGT trap…
The last five years have seen a tangible increase in the number of home owns electing to let and rent, rather than sell and buy (whether due to the market having peaked where they live, or to avoid the costs of selling and buying). However, many appear blissfully unaware of the consequent taxation trap that might awaits them whenever they do decide to sell.
Most owners rely on their principle private residence being exempt from Capital Gains Taxation; but few realise that tax is chargeable for any period when that home is let and even fewer appreciate the impact that last Autumn’s budget had on the tax reliefs hitherto available.
Letting Relief currently enables each owner to claim CGT exemption of up to £40,000 for the period that their principle residence is let; however, last year’s budget now restricts Letting Relief from April 2020, to the period that the property owners are also occupying the property – which is such an unusual scenario, it effectively removes this valuable relief for the majority of owners.
The second impact of the budget was to dramatically reduce the period that one’s principle residence still qualifies for relief once the owners have vacated; hitherto, this extended PPR relief for 18 months from the last period of their occupation but this period was halved by the budget to just 9 months.
With CGT rates for the vast majority set at 28%, the effects of these changes can be dramatic. As an illustration, take Mr & Mrs X, who purchased their principle residence in 2005 for £1 million (and spent £50,000 on re-wiring, refurbishing a couple of bathrooms, decoration and roof repairs – none of which qualify as capital improvements).
In 2015 they decided to move closer to their children’s new schools – but, rather than selling and purchasing, as prices were waning where they were, they decided to keep and let their current home, and rent instead). By 2020, they decide to downsize and move to be closer to their children (now living in London), so they sell their house, which realises £2 million.
You can understand their surprise at learning that, even with personal allowances, this has triggered a joint Capital Gains Tax liability of £72,600 – and that is on top of the £96,000 higher rate income tax they have had to pay on their five years rental income!!