The Chancellor of the Exchequer has the future abolition of one very valuable Capital Gains Tax (CGT) allowance – to all intents and purposes - and a reduction in another.
Where you own property that you have both lived and let out to tenants, when you sell it part of any profit you make on the disposal are subject to CGT. The period you actually lived in the property is exempt from CGT as are the last 18 months you own the property, whether you still live in it or not. The rest is subject to CGT.
However, in this scenario, where the property has qualified as your Principal Private Residence (PPR), you can also claim “Letting Allowance” of up to £40,000 (for each owner, so for a husband and wife up to £80,000).
From April 2020 this relief will only be available if the owner is in “Shared Occupation” with the tenant; how often will that be the case!
The last 18 months is also halved to just 9 months.
So what does this mean?
An owner makes a £120,000 gain on disposal of a property they owned for 10 years.
They occupied it for the first 3½ years, adding the last 18 months to this half the gain is covered by PPR leaving a potentially taxable gain of £60,000.
The letting allowance of £40,000 reduces this to £20,000 less the annual CGT allowance of £11,300 (for 2017-18) so the taxable gain is further reduced to £8,700.
The CGT liability on this is £1,560 (at basic rate of tax) or £2,436 if taxed at the higher rate.
Under the new rules from April 2020 the period that qualifies for PPR drops becomes 51 months (last 18 month period reduced to 9) so the PPR exemption falls to £51,000 leaving £69,000; with no letting allowance available this now represents the chargeable gain.
After deducting the annual CGT allowance of £12,000 for 2020/21 the taxable gain is £57,000.
Assuming other income utilises the personal allowances for 2020/21 at best £37,500 falls into the basic rate tax bracket leaving at £19,500 falling into the higher rate tax bracket giving a CGT liability of:
(£37,500 x 19%) + (£19,500 x 28%) = £12,210
This is an increase of over £10,600 for a basic rate tax payer, for a higher rate tax payer where the whole gain was taxed at 28% the CGT charge would be £15,960 which is an increase of over £13,500.
So if you are in this situation is it worth selling before April 2020 to “cash-in” the letting allowance?
Possibly, but if you are proposing to purchase another investment property don't forget this will incur an additional 3% stamp duty surcharge which may wipe out the benefit of the letting allowance.
It will need some careful thought and the best advice would be talk to your accountant to get some advice!