Christina Nawrocki FCCA looks at two of the significant changes that will be affecting landlords after Philip Hammond’s Budget 2018 announcement.
Being a landlord can be a stressful endeavour, particularly with the new tax changes coming into effect after the Budget 2018 was announced last month. Not only will you have to manage any issues with your tenants, but you also have to keep up with the latest landlord tax changes which may have you questioning, “is buy-to-let still worth it?”
October brought forth another tough budget for landlords following the harsh measures that came in the Summer Budget 2015 which saw the limitation of tax reliefs on finance costs, new rules regarding wear and tear allowance, and changes to stamp duty, capital gains and the annual tax on enveloped dwellings (ATED) rules.
The Budget 2018 has come at a time when many of are starting to feel the effects of the Chancellor’s tax measures announced in 2015 as mortgage relief restrictions are currently kicking in – being phased in from April 2017 and to be fully enforced by April 2020. We’re currently seeing landlords paying more tax as a result of these changes, and the bad news keeps coming in this latest budget.
There are two significant changes in the latest set of tax announcements that will have an impact on landlord's investments:
1. Capital gains tax lettings relief
Lettings relief is an 'additional relief' available to individuals where the let property was once their principle private residence. This fundamentally means that at some stage of ownership the owner had to reside there.
HMRC conveys that you can get the lowest of the following:
the same amount you got in Private Residence Relief
the same amount as the chargeable gain you made from letting your home
From April 2020 the government will reform letting relief so it will only apply in circumstances where the owner of the property is in shared occupancy of the tenant.
An important scenario to consider: double relief
Couples who own a property together, which they've lived in as their main residence at some point, and let it out are entitled to two individual allowances of lettings relief, which means a couple could make a substantial gain and pay no tax on the sale of their property. The major change in the rules should prompt you to review your buy-to-let property investment now.
It might be worth considering the sale of your rental property before April 2020 to ensure you receive as much relief as possible. This is particularly the case for married couples or civil partners who would see a significant potential relief benefit.
2. Capital gains tax Principal Private Residence relief (PPR) on second properties
The second significant change announced by Chancellor Philip Hammond was that the final period exemption will be reduced from 18 months to 9 months. What does this mean? For the last 18 months of ownership, even if the property was rented out you get Principle Private Residence relief (PPR), meaning you wouldn't have to pay capital gains tax on gains made during that 18 months period; but this will be changing to the last 9 months as of April 2020.
A little back history on PPR relief: The eligibility time frame to claim PPR has seen a reduction over the years. At one time PPR could be claimed for 36 months, and then from April 2014 this was cut from 3 years to 18 months. Now the most recent budget has introduced the shortest amount of time at only 9 months.
How will this affect the buy-to-let property market?
No one can say for certain what effect the final exemption period change will have on the market just yet; but without the benefit of a longer final exemption period a potential prediction could be made that buy-to-let landlords will be looking to unburden themselves.
This means a flood of properties hitting the market which could cause a decline in house prices due to a surplus of inventory (welcome to a buyers market!) as the uncertainty of future returns looms over the rental market.
How to prepare for the new budget changes
If you’re a property investor trying to decide the best plan of action to deal with these new changes, it may be wise to adopt a proactive approach and speak with a professional. Some landlords may decide it’s best to sell prior to the reform dates, while others will consider retaining their buy-to-let properties.
It’s important that in either situation you are appropriately informed and plan accordingly, if you have questions and need advice on how to prepare for these changes you can book a meeting with a Wellers’ advisor.
The content of this post is up to date and relevant as at 09/11/2018.
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