At the height of the financial crisis, a new term – “the reluctant landlord” – was widely used to describe someone who, having purchased a new home but failed to find a buyer for the old one, had no alternative but to let out the latter to tenants.
Fortunately, reluctant landlords are now rare but “the accidental landlord” has continued to be an integral part of the rental market for some time.
The term refers to someone who perhaps lives in Edinburgh, Glasgow or Aberdeen, or a sought-after provincial town like Stirling. These individuals generally hold down well-paid, professional jobs which require them to work abroad or in another part of the UK, often for long periods. Understandably, therefore, they will let out what is their “main home”, not just for money but for reasons that include security and a desire to have the property “lived-in” while they are away. This means they will sometimes charge below-market rent if it means securing a tenant who ticks every conceivable box.
So, if working away from home for long periods, becoming an accidental landlord seems sensible, and perfectly innocent. But not to our Chancellor, Philip Hammond, who in last week’s Budget hammered accidental landlordism, with changes to Capital Gains Tax (CGT) and a process called “private residential relief”.
At present, anyone who has let out their own home for a period is liable to pay CGT on any relevant profit once they come to sell it - how much depends on how long they have lived there.
CGT does not apply for the years the owner lived in the property and there is an additional exemption for the final 18 months of ownership, even if the individual has not lived there during that period. However, from April 2020 this final period exemption will be cut to nine months, which will effectively make the vendor liable to pay more tax on a sale. But the real blow is the Chancellor’s decision to end private lettings relief (PRR), which currently provides up to £40,000 of relief (£80,000 for a couple) to the people whose circumstances I have described above. Under new rules, lettings relief will only apply where the owner is sharing occupancy of the home with a tenant.
To illustrate the possible effect, the HMRC website gives an example of what happens at present if someone makes a gain of £120,000 after selling a property they have owned for 12 years, spent six of those living in there and let for the remainder. Currently, they would receive PRR for the first six years, plus for the last 18 months (whether letting the property or not), totalling seven and a half years of tax relief (i.e. 62.5 per cent of the time they owned the property). This means liability for CGT only on the remaining 37.5 per cent (i.e. £45,000) of the gain not covered by PRR. The tax liability is further reduced because the owner can claim that £40,000 in lettings relief, meaning they will pay CGT on £5,000.
Once the new rules come into effect, the effect of reducing the final exemption period from 18 to nine months could amount to peanuts compared to the consequences of losing the £40,000 of private lettings relief, leading to a CGT bill considerably more than what someone pays at present. For the record, CGT on property for the current and next tax years is 18 per cent for basic rate taxpayers and 28 per cent for higher rate taxpayers.
Of course, money will be handed over to HMRC only if there is a taxable gain on a sale, but as affected properties are likely to have been in the hands of owners for some time this means they are likely to have built up considerable equity over the period – and the greater the profit, the higher the tax bill.
For this reason some accidental landlords may wish to think about taking advice now if they want to avoid an unanticipated tax bill further down the line. But that’s one, initially at least, for their accountants rather than their estate agents.
- David Alexander, MD of DJ Alexander.