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Hot Topic – Increased CGT for Landlords from April

Hot Topic – Increased CGT for Landlords from April

Hot TopicFrom April 2014 landlords will see a reduction in a valuable tax break which could hit some quite hard.

Currently, if you own a second property there is an exemption that means if at any point that property was your main residence, the last 3 years of ownership still qualify for the private residence relief (PPR) and will be free of CGT.  From April this tax free period is to be halved to just the last 18 months.


Belinda bought a house 13 years ago for £200,000.  She lived in it for 6 years and then rented it out.  The house is now worth £320,000.

If she sells it, Belinda’s profit is £120,000 (ignoring any costs to enhance the property or costs of buying and selling – these could all be deducted too).

Because Belinda lived in the house for 6 years she can claim PPR for that PLUS the last 36 months of ownership even though she wasn’t actually living there.  This means 9/13 of the profit is not taxable. It doesn’t end there though.  She can also claim letting relief.  This is worked out as the lower of £40,000 or the amount of PPR already calculated or the amount of gain she’s made after PPR is applied ie the gain made because of the letting.  So the PPR relief she is getting is £83,077 – 9/13 of £120,000.  The amount of gain left after PPR is applied is £120,000 – £83,077 = £36,923.  The lowest of the three amounts is £36,923 so Belinda gets this as letting relief which wipes out the gain.

From April, the 36-month exemption reduces to 18 months.  For Belinda this means the PPR would reduce to £69,230 (7.5/13 x £120,000) – leaving £50,770.  The letting relief would allow another £40,000 and in this example the CGT allowance, if not already used, would wipe out the rest of the gain.

You can see that landlords, in particular those in London, who have made considerable gains over the last 10 years on properties they have mostly rented, will find they have an increased tax liability come April.  Should they decide to sell up quick to benefit from the current 3 year exemption, the exchange of contracts must happen by 6 April with completion 12 months later.

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