Insights

As announced in the November 2022 Autumn Statement, the annual allowance for capital gains tax (CGT) will be reduced from April 2023. Each taxpayer’s personal CGT allowance will reduce from £12,300 to £6,000 with effect from 6 April 2023 and from 6 April 2024 it will reduce to £3,000.

The rate of CGT payable can vary. Capital gains above the annual exemption is  taxed at the rate of 10% or 20% depending on the taxpayer’s income tax bracket. This is with the exception of gains arising from residential property which are taxed at the rate of 18% or 28%, depending on the taxpayer’s income tax bracket.

Taxpayers who may wish to sell assets before the CGT allowance changes have only a couple of months left to take full advantage of the current allowance. Note that for an asset that is jointly owned between spouses or civil partners, the gain arises 50% to each, so that the allowance of  £12,300 is effectively £24,600.

Restrictions to CGT lettings relief

Aside from these most recent changes, other restrictions to CGT tax relief have been introduced in recent years in relation to property asset disposals.

Firstly, CGT relief for property that had been an individual’s principal private residence (PPR) and had also been rented out was significantly restricted for disposals made after 6 April 2020. During the 2019/2020 tax year and prior to this, if a former main residence was let out after occupation, or a rental property was subsequently occupied by the owner as their main home before a sale, they would be eligible for tax relief on any capital gains arising; this relief could be significant.

From 6 April 2020, the rules changed and became more complicated. If a property was sold after this date, conditions for lettings relief became less favourable and the relief would only be available if the owner was also living in the property as their main residence together with tenants – as a single household. It means that if a property was fully let, no lettings relief would be available during for such lettings periods; the eligibility only occurs when the owner occupies the property at the same time.

Although the way lettings relief is calculated hasn’t changed, the fact that the eligibility has been significantly restricted means the relief is no longer available to most landlords who have also occupied their let property.

How is lettings relief calculated?

Lettings relief can be claimed against a capital gain based on the time during which the property was let and occupied by the owner as their PPR, as it relates to the total period of ownership of the property. The amount of relief available will always however be the lower of the following:

• The amount of the exempt gain relating to the time during which the property was the owner’s main residence;
• The value of the gain attributable to the let period; or
• A flat rate of £40,000 per owner.

HMRC’s stance on lettings relief

If you are selling a rental property and hoping to claim lettings relief, be aware that it is frequently challenged by HMRC so getting some professional advice is recommended. It is also important to provide clear proof of joint occupation.

When a rental property that was also a main residence is sold, there is an interplay between lettings relief and principal private residence (PPR) relief. If a property qualifies for PPR relief, note that the last nine months of the ownership period will be exempt from CGT regardless of the rental circumstances.

Things become confusing in cases where landlord and tenant are occupying the home as a single household. For instance, if the owner is renting out a granny flat or annexe when living in the house, the tenant does not have exclusive use, therefore lettings relief isn’t available. Instead, PPR relief will be available on the part of the property that is owner-occupied, on a pro-rata basis. If the rental part of the property is a separate dwelling, this will not be covered by PPR relief.

60 days to pay CGT and file return

Finally, whatever the gains when you sell a residential property, any CGT due must be paid within 60 days, and submitted together with an online interim tax return.

Due to the complexity around lettings relief and PPR relief, it is worth getting professional advice to understand your CGT liability. If you require further advice on property tax, contact us via partners@rjp.co.uk.