Changes to capital gains treatment on rental properties

With effect from the start of the 2014/15 tax year there has been a change to the way gains on the sale of rental properties are calculated which could mean that landlords selling properties with significant gains end up with rather more capital gains tax to pay than would have been the case previously.

I’ll briefly recap the three main reliefs on the sale of rental properties if they have been lived in for at least some of the time that they were owned –

Principal private residence relief (PPR) – any period that the property was the PPR of the owner is exempt from tax, this is time apportioned so for example if you own a property for 6 years and lived in it for the first 3 years before letting it for 3 years and then selling it 50% of any gain would be tax free.

Lettings relief – provided the property has been commercially let at some point then it also qualifies for a lettings relief of the lower of the following  –

• £40,000 (or £80,000 if jointly owned),
• the exempt PPR gain element,
• or the non-exempt element of the gain.

Final period of ownership – provided the property has at some point been the owners PPR then the final 18 months (previously 3 years) of ownership also qualifies for exemption from CGT. To give an example, taking our earlier property that was owned for 6 years, and let for 3 years the CGT free period would include the final 18 months giving a total of 4 1/2 years or 54 months exempt and only 18 months taxable. This is therefore 54/72 or 75% of the total gain. Note that prior to 5th April 2014 the exempt gain would in fact be 100% (3 years PPR plus last 3 years final period).

Example

So let’s assume that the property we’ve owned for 6 years was bought for £300,000 and sold for £600,000. The CGT calculation would look like this –

Gain    £300,000

Exempt period – 3 years PPR plus 18 months final period so 4 1/2 years in total

Proportion of gain exempt  75% or £225,000

Remaining gain  £75,000 (£300,00 at 25%)

Lettings relief £40,000 (lower of £40,000, PPR exempt element of £225,000 or non-exempt element of £75,000)

Taxable gain £35,000

So in this case there is likely to be significant CGT to pay at a rate depending on other disposals and other income whereas if the property has been sold prior to 5th April the whole of the gain would have been exempt.