Two key changes are coming into effect that will impact both second homeowners as well as buy-to-let landlords. Changes are being made to both lettings relief as well as the final period of exemption. This will ultimately impact capital gains tax liability for second homeowners and landlords when a property is sold. The legislation will be part of the Finance Bill 2019-20 and come into effect in April 2020. 
Currently, letting relief ensures that when you let out a property that used to be your main residence, you can claim lettings relief through the period when the property is being let once you are ready to sell. 
 
Effectively, this means that you are able to reduce the capital gains tax that will be due on the sale of the property. You will be able to claim £40,000 as an individual or £80,000 if the property is jointly owned with a partner or spouse. 
 
The newly proposed change will mean that sellers will only be able to claim this relief if they occupied the property with the tenants during the same period. This will greatly restrict the number of people who can access letting relief, as most buy-to-let landlords do not share a property with their tenants. 
 
As such, it's important to seek our advice if you wish to sell your property in the most tax-efficient way possible. 

Final period of exemption 

At the moment, this form of relief can be claimed when a property is on sale, as long as the individual or individuals selling the property lived there at some point during the ownership. 
 
Ultimately, it is required that the individuals lived in the property for the final 18 months, even if they had already moved into their new home during this period. Assuming that the property is sold within the 18 months of the owner moving out, they will not need to pay capital gains tax on the property at the point of disposal. 
 
The new proposal will mean that the period for exemption relief will be reduced to nine months. However, the 36 month period for an individual who lives in a care home or who is disabled will remain. 
 
This reduction will have an impact on any individual who is currently selling their main home and has gained a particular period of private residence relief. 

Implications 

The changes do present certain implications for any property that is sold in the new tax year. The new adjustments could be costly, particularly when taking into account another change that will come into effect on the 6th April 2020. 
 
After 30 days of the completion of the sale of a residential property, an individual will need to submit a provision calculation for the amount gained and complete payment on the tax that is due. 
 
The gain is recorded on the self-assessment form and if you are not registered then you will need to register before the sale. You must also adjust the amount for any tax that is due or recoverable. 
 
If you have overpaid, then you will need to wait until the return has been submitted before you can obtain that amount. It is possible that you may have difficulty determining whether you need to pay 18% or 28% in tax. This will be determined by your income for the year, which can be impacted by various individual circumstances such as a period of redundancy or a change in position. 
 
Arguably, this means that gifting property to a family member or selling a property should be completed well before these changes come into effect. If you are completing disposal after the 6th April 2020, there are a few considerations to make. 
If you are married, then you should ensure the property is in a joint name. This will provide the lowest possible rate for CGT and allow you to access the annual allowance. 
 
You may also want to consider selling shares that are demonstrating a loss before selling the property. This will again help to reduce the CGT. 
 
It is worth noting that if you sell the property before the new changes come into effect, the tax will not be due until January 2021 although you are able to make payments on the account before that point if you need to do so. 
 
These amendments are also designed to make the transfer of property between partners and spouses fairer. Ultimately, it will mean that those inheriting the property will inherit the property’s history of use as well. 

Next steps 

We highly recommend that you speak to us before you make any decisions regarding potentially selling your property. We can help you figure out the most tax-efficient way of doing so, and of course ensure that you remain compliant with the law at the same time. 
 
As always, please do get in touch if you have any questions about Capital Gains Tax or any other buy-to-let related queries. 
 
 
 
Written by 
 
Nicola J Sorrell 
- Effective Accounting 
 
Founder | Xero Champion | IR35 Expert 
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