Beware the £470m home rental tax trap for accidental landlords

More than half a million ‘accidental’ landlords have less than a year to sell up before they could be hit with new tax bills for thousands of pounds.

Earlier this month, the Government put forward plans to scrap two types of tax relief for landlords who sell a property that was once their main home.

The tax grab, which will come in from April 6, 2020, is expected to raise £470million for the Treasury over five years, according to accounting firm RSM.

But experts say the move could lead to a rush of house sales over the next 12 months as landlords look to flee the buy-to-let market before April.

This sudden increase in supply could, in turn, even cause house prices in some areas to fall.

An accidental landlord is someone who didn’t buy a property with the intention of letting it out, but has since ended up doing so.

Some may have inherited a property or been unable to sell their own home. Or they may have had to relocate suddenly for a new job or moved in with a partner and decided to hang on to their own property in the short-term as a safety net.

When you sell investment property, you must pay capital gains tax on any profit you make.

For example, if you bought a buy-to-let property for £100,000 and sold it for £200,000 you would have to pay tax on the £100,000 gain.

Everyone has a capital gains allowance of £12,000 a year. But on any profit above that, a basic-rate taxpayer would have to pay 18 per cent in tax on the gain. A higher-rate taxpayer would have to pay 28 per cent on the gain.

If, however, you rent out a property that was once your main home then, when you sell, you only have to pay tax on the amount it went up in value by (the gain) since you left.

Currently, landlords can also add 18 months on to the amount of time they lived at the property, for tax purposes.

For example, if you have owned your property for ten years, living in it for the first five, and renting it out for the next five, you can claim you lived there for six-and-a-half years when calculating your tax bill.

This is the five years you actually lived there plus the 18-month extension.

This benefit — known as principal private residence relief — has been available since capital gains tax was introduced in 1965. However, from 2020 the extension will be slashed to nine months — despite Brexit causing economic uncertainty.

The Government is also scaling back lettings relief. Currently, when a landlord sells their former home after renting it out, they are allowed to shelter £40,000 of their gain from capital gains tax. For couples this can be up to £80,000.

Under the new rules, announced in the Budget last autumn, only landlords who live in the property with their tenants will qualify for this benefit from April 2020.

Landlord Jonathan Stevens, 48, became an accidental landlord in 2016.

With a growing family, he and his partner Patricia decided to rent out their two-bedroom flat in West London, where they had lived for six years, and move to the West Country.

The couple bought their flat for £300,000 in 2010. It is now worth £525,000. If they sold the flat now, their tax bill would be £4,550 as Jonathan is a higher-rate taxpayer. Under the new rules, it would be £20,475.

The couple are also tied into a fixed mortgage deal until May 2020 — one month after the tax rules change — and so face paying hefty exit fees to sell early.

Jonathan says: ‘I can’t sell now as I will have to pay an early redemption penalty on the mortgage. I am no longer making any profit on the rent and I can’t claim lettings relief.’

Tony Gimple, from Less Tax For Landlords, says: ‘If you are only a landlord by chance … speak to a property tax specialist or accountant about how you could be affected by the proposed changes.’