Landlords letting out their former homes were hit with another tax blow from the Government in yesterday’s Budget announcement.
The Chancellor, Philip Hammond, announced that he would reform lettings relief, so that it only applies in situations where the owner of a property is in shared occupancy with their tenant. This means that landlords will no longer be able to claim the £40,000 relief on their Capital Gains Tax (CGT) bill when selling a property.
This reform will apply from April 2020, with the final period exemption reduced from 18 months to nine months.
There will be no changes to the 36-month final period exemption available to disabled people or those in a care home.
Lettings relief can reduce the CGT on the sale of a property that was, at some point, used as the taxpayer’s residence, but which has since been let as residential accommodation.
Landlords Hit with Another Tax Blow in Budget
This is the latest tax blow for landlords, who have been hit in recent Budgets.
In April 2016, the Government imposed a 3% Stamp Duty surcharge on the purchase of additional properties and, a year later, restricted tax relief on mortgage interest for higher rate taxpayers.
Lilla Dilliway, the Director of BlueWing Financials, comments on the latest tax blow: “In my experience, most people who share their home with a tenant do not officially admit it, so the rental income is unlikely to make it onto their tax return. As a result, I am not sure that people are even aware of this lettings relief, let alone make use of it. Those who claim it will not be happy about any reduction, but, overall, I would assume that the changes will only impact a relative minority.
“As a side comment, lenders don’t normally allow tenants in someone’s main residence, but would normally give consent to a lodger. The reason being that a tenant has different legal rights from a lodger, so if the landlord had to repossess the property, they’d have a hard time kicking out a tenant.”
Neil Cobbold, the Chief Operating Officer of PayProp UK, was surprised that Hammond didn’t take this tax blow further: “It’s surprising that the Government did not announce a more stringent clamp down on short-term lets. This sector provides a great boost to the economy, but has grown rapidly in recent years and greatly affects the fortunes of the lettings sector, so it is arguably the right time for initial regulation.
“There has to be an equal tax footing for conventional landlords and those looking to let their homes on a short-term basis, and the proposal for limited tax relief on properties where the owner is in shared occupancy with the tenant marks the very first step towards achieving that.
“Over the next decade, it’s likely that the short-term lets market will continue to expand, so it will be interesting to see if the Government takes a similar regulatory approach as it has done with standard lets in the private rented sector.”
John Socha, a 60-year-old landlord from Northamptonshire, is disappointed: “I think there’s someone in the Treasury who really, really hates landlords. The new tax regime on buy-to-let is madness. In any other business, you are able to write your costs off against your income, but you can’t do this with mortgages any longer.”
He believes that many landlords will incorporate their lettings businesses to mitigate the impact of the additional CGT. He says that CGT is a huge issue for landlords, particularly those who want to sell because of previous tax changes imposed by the former chancellor, George Osborne.
“Some buy-to-let landlords have started to pull out because of the tax changes,” Socha claims. “But I’m buying more, and I’ve also started building. The thing about selling out is the CGT you have to pay. There was some talk before the Budget about reducing CGT if you sell to your tenant, and that would have been a good idea.”