TT296: Buy-to-Let Tax Planning

July 29, 2019

In recent years HMRC has introduced measures that have impacted, mainly negatively, on buy-to-let landlords. In the 2018 Budget there were yet more announcements due to take effect in April 2020 which affect let properties and in particular let properties where the owner once occupied the particular property as a main residence.

As a not-so-trivial aside, for UK residents a new 30-day tax payment deadline and reporting obligation is introduced for sale of residential property on or after 6th April 2020. This has the effect that a sale on 5th April 2020 would have a capital gains tax payment date of 31st January 2021, but a sale a day later would a have tax payment date 30 days after the sale. Note that reference to a sale for the purposes of the 30-day rule is a reference to completion rather than exchange of contracts.

More importantly, though, there are two measures affecting the calculation of the gain on which capital gains tax is charged and these relate to the final period of deemed occupancy for the purposes of main residence relief and, most crucially, changes to lettings relief.

The final deemed period of occupation is reduced from 18 months to 9 months for disposals following 5th April 2020 in a clear attack on the process known as “flipping” where elections have previously been made in respect of second homes. The effect of a main residence election was to “bank” the final period of deemed occupancy for a property which although a residence, was not necessarily the one where the tax payer spent the majority of their time or was not necessarily the one where growth in value was expected to be the strongest. This measure could have a major impact on the quantum of gains and tax due, particularly where the period of ownership has been short, but value growth has been strong.

More serious is the effective abolition of lettings relief. Currently, otherwise chargeable gains of up to £40,000 (£80,000 for joint owners who are married or in a civil partnership) can be sheltered from tax, although the precise amount of relief available currently cannot exceed either the lower of the gain otherwise exempt from charge by virtue of main residence relief and the gain attributable to the period of letting (on a time apportioned basis). In many cases where properties have been a main residence for many years and have similarly been let for a considerable period, the full amount of relief is available. With effect from 6th April 2020 this relief is only available in respect of periods of cohabitation of owner and tenant and there is no grandfathering of periods where there was no cohabitation falling before that time. The effect in most cases will be to make lettings relief completely unavailable to taxpayers and even where it remains available its value will be severely restricted.

There is therefore little time to take advantage of the current reliefs available, but the current regime will remain for disposals (exchange) up to 5th April 2020. Taxpayers intending to sell former residences, particularly those that have previously been let, should therefore consider expediting matters if they can, to preserve the current more generous reliefs and time to pay arrangements.

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