25 July 2017

Are you an ‘unintentional’ landlord?

If you're thinking of selling a residential property that you are currently renting out there are some important tax consequences and reliefs to consider.

If you moved out of a previous home and are now renting that property out, you are commonly referred to as an ‘unintentional’ landlord. For many, this used to be a very attractive arrangement, with rental income often covering mortgage payments and tax liabilities. However, with the restriction on mortgage interest tax relief being introduced on 5 April 2017, many of these ‘unintentional’ landlords are now considering selling up.

If you have moved out of, and are thinking about selling, a former home you should consider the possible capital gains tax (CGT) implications and tax reliefs available, as we outline in this article.

Selling an investment property that has increased in value since you initially purchased it may lead to a capital gain, which is subject to CGT at a rate of 28%. You’ll need to pay this to HMRC on 31 January following the tax year in which the sale takes place, and report the capital gain on a self-assessment tax return.

Information relating to the sale of any property is available to the public, and HMRC will use this information, along with council tax and land registers records, to identify any land transactions that have not been reported on a tax return. So it’s important you disclosure the relevant information to HMRC on time.

Principal Private Residence Relief

If it is your principal residence that you are selling, and therefore a property that you have lived in continuously throughout the period of ownership, the sale will be entirely exempt from CGT.

If, on the other hand, you moved out of the property at any time prior to the sale, Principal Private Residence relief (PPR) can prevent or reduce the CGT liability arising on the sale. This may mean that only a reduced amount of PPR will be available.

Generally, PPR is calculated in relation to the period you actually lived in and owned the property, with the exception of the last 18 months of ownership. During these last 18 months, you receive full PPR regardless of whether or not you continued to live in the property during that time.

Letting Relief

If you let out the property after moving out then a further relief, known as Letting Relief, may be available. This is a very valuable capital gains tax relief, which could be worth up to £11,200 in tax.

The relief can only be claimed in conjunction with PPR, however, and the amount available to reduce any CGT liability will depend upon a number of factors, including the initial price paid, final sale price, ownership period and periods of occupation by the owner and tenant.

If you would like to discuss the tax consequences of selling your residential property in more detail, and ensure you make the most of the available reliefs, please do not hesitate to contact me or your usual Scott-Moncrieff contact.

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