It's been estimated that in the UK there are as many as 500,000 accidental landlords. These are people who didn't buy a house or flat intending to rent it out but, due to a change in their circumstances and the unstable property market in some parts of the UK, they have ended up doing so. Common reasons for becoming an accidental landlord are moving in with a partner, a job move to a different part of the country, death of a family member or divorce.
If you have become an accidental landlord, I suggest you read on as a less than accidental tax change is going to bite hard into any profits from letting from next tax year.
Currently, if you have let a property that was once your main residence and that property is then sold, you will be liable to Capital Gains Tax (CGT), this is on the total gain since the property was purchased but relief is given for the period of occupation.
So, if you occupy a property as your main residence for five years then rent the property for a further five years, 50% of the total gain will be liable to CGT. In addition, the last 18 months of ownership are exempt from tax even if you were not living in the property and lettings relief of up to £40,000 (£80,000 for a couple) may also be available.
From April 2020, the 18-month grace period reduces to 9 months and lettings relief will only be available where the owner is in shared occupancy with the tenant.
A worked example will show the increase in tax (all costs and proceeds are net):
John and Joan buy a house for £200,000 and live in it for 10 years. Then they rent it out for ten years and finally sell it for £500,000 – a gain of £300,000.
The Private Residence Relief (PRR) is currently 10 years plus 18 months, which is 11.5 years out of a total ownership period of 20 years (57.5%) giving £172,500. This reduces the gain from £300,000 to £127,500.
They would also receive lettings relief, which is the lower of the gain attributable to the period of letting or £40,000 x 2. In this case, the gain attributable to letting is 10 years out of 20 (50%), which is £150,000. The lettings relief is, therefore, £80,000 and the taxable gain is £47,500 (£17,500 less £80,000).
If we assume that neither John nor Joan have any other capital gains that year, they will also both have a £12,000 CGT allowance so they will pay tax at either 18% or 28% on a gain of £23,500. Assuming both John and Joan are Higher Rate taxpayers this will be a tax liability of £6,580.
From April 2020, the PRR reduces to 10 years 9 months (53.75%) which is £161,250 and lettings relief is not available. The taxable gain becomes £138,750 reducing to £114,750 after annual allowances. This is an additional chargeable gain of £91,250 and tax of £25,550 assuming both John and Joan are Higher Rate taxpayers.
As further punishment, the capital gain will have to be reported to HMRC within 30 days of the completion date and, if CGT is due, it must be paid at the same time.
The message is simple – if you have become an accidental landlord, do not become an accidental contributor to UK PLC. By selling your property before the end of the tax year, you could significantly mitigate your future tax liability.