Private Residence Relief (PRR) and Lettings Relief and the impact on property investment (Part 1)

Property has long been a favoured option for those investors seeking higher returns on their excess cash, with investing in a tangible asset such as property often more appealing than the potential uncertainties when investing in other, less tangible investments such as shares.

However, in recent years we’ve seen an increasing number of disincentives aimed at buy-to-let landlords with the sole aim of cooling the until recently ever-expanding sector, signs are that the steps taken so far may have been successful. Recent surveys indicate increasing numbers of landlords considering selling properties, with around 50% concerned that their properties will not provide a sufficient return in the future.

Let’s start by recapping on the main changes. Since 2016 those who have purchased a property that is not to be their primary residence have had to pay a Stamp Duty Land Tax (SDLT) surcharge of 3% on top of the ordinary rates of SDLT payable. In addition, from April 2020 landlords will be unable to offset any mortgage interest against their rental income.

Furthermore, the tax payable on any profit made when a second property is sold has also been targeted. Ordinarily gains in excess of the Capital Gains Tax (CGT) exemption (£12,000 in the 2019/20 tax year) would be taxed at 10% if you are a basic-rate taxpayer, and 20% if you are a higher-rate taxpayer. However, an 8% surcharge applies to any gains realised on the sale of a residential property that is not their primary residence, meaning a basic-rate taxpayer would pay 18% and a higher-rate taxpayer 28%.

From April 2020 new rules are set to come into force which reduce the CGT tax reliefs available to those looking to sell a property which has formerly been their primary residence. The reliefs in question are Private Residence Relief (PRR) and Lettings Relief.

Starting with the former, in simple terms PRR allows for any period of occupation of a property, where the property was your primary residence, to be disregarded when calculating the potential CGT liability upon the sale.

It is also worth noting that you can also receive PRR for the last 18 months ownership of the property, even if you were not living in it during that time. However, and here’s the change, this 18-month period will reduce to nine months from April 2020.

There are currently special rules that allow disabled homeowners, or those in care, to receive PRR for the last 36 months of ownership. These special rules are not affected by the forthcoming changes to PRR.

Let’s now turn to Lettings Relief which is where the more significant potential issue for landlords may arise. Currently, Lettings Relief provides CGT relief of up to £40,000 to those who let a property that has previously been their primary residence.

However, from April 2020 Lettings Relief will be restricted to situations where the owner of the property was in shared occupation with the tenant. Therefore, this is likely to remove the availability of this relief for the vast majority of buy-to-let landlords, potentially leading to CGT liabilities that would have previously been avoided entirely.

Finally, under the PRR rules, the mechanics of how the ownership period is attributed following a transfer of ownership between married couples and civil partners (known as an interspousal transfer) is also changing. However, this complicated matter sufficiently justifies its own blog in order to outline the relevant changes adequately.

Needless to say, if you’re planning to sell a property that was previously your primary residence, and which has subsequently been rented out, it might be worth considering your options prior to April 2020.