Home Rental Tax Trap



The Government have put forward plans to remove a valuable tax relief that could cost you thousands on the sale of property.

There is no capital gains tax (CGT) payable on the sale of your main residence, but there is on a second property. If for example you bought a buy to let property for £300,000 and then sold it for £400,000 you would have made a gain of £100,000. We each have CGT allowance of £12,000 in this current tax year so £88,000 would be potentially liable to CGT.

The rate at which you pay CGT depends on your income. If you are a higher rate tax payer, then this is a simple sum as you can subtract your allowance from your gain and then your bill will be 28% of the remainder. It is a little trickier if you are a basic rate tax payer as you will need to add the gain less your allowance to your income and if this pushes you into a higher rate tax band then anything above the higher rate band would be charged at a higher rate of 28% and everything below this at 18%.

You can help yourself with this by considering holding a property in joint names so making use of two CGT allowances. If you have used all or part of your CGT allowance for one tax year then it may be worth considering delaying a sale until the following tax year when you will have your full allowance again.

If you once lived in a property as your main residence and subsequently moved out and let it out, you get a relief of the CGT that could potentially be due when this property is sold. There are more than half a million of us who could be affected by this. It’s not hard to imagine that there would be many situations where people have inherited property or had to move due to work commitments or, needing a larger home to accommodate a growing family and not sold the original residence.

The current arrangement is that you would only have to pay capital gains tax on the amount the property had gained in value since you had left. So, if you had owned the property for 10 years and lived in it for five years you can claim that you lived in it for six and a half years, as you are allowed an additional 18-month extension on the period you lived in the property. This extension is called principal private residence relief and has been around since 1965.

In 2020 this will be cut to just nine months.

There is also the scaling back on lettings relief where a landlord is selling a former home that was then let out. Currently they would be able to shelter £40,000 of this from CGT. This is also changing to only apply to landlords who live with their tenants being able to benefit from this relief.

There is a concern that this could lead to a number of landlords pushing to sell their properties before this change comes in and concerns by some that this could lead to a reduction in house prices in some areas.

This is certainly something to consider of you are a landlord and have plans to sell as it may well be worth doing this sooner rather than later and if you are looking to buy it could even be an opportunity for a good deal.

Kristina Bailey Dip FA CeMAP


This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case. Based upon our understanding of UK tax law at June 2019. The value of investments can fall as well as rise and you may not get back the full value of your investment