Don't miss out on lettings relief


DON’T MISS OUT ON LETTINGS RELIEF – It will be gone from April 2020!

The government has sought to help first time buyers to purchase property by increasing the tax burden on landlords in an effort to release more properties for first time buyers. In addition to the restriction on tax relief on interest payments, a significant change is set to be introduced from April 2020 with the withdrawal of general lettings relief which will further increase tax liabilities on sales.

Lettings relief applies when an individual previously lived in a property and subsequently lets the property before selling. From April 2020 the relief will only apply when the landlord lives in the property whilst it is let!

For example, David has three properties, the family home, a house he used to live in before he met Victoria and had a family, and a flat he purchased in Manchester for when their son was at University, which is now let out to other students. The phased restriction on interest deductions on mortgage interest have increased the tax paid on rents (see example 1).

Example 1: Increase tax on rents

£10,000 rental income, £5,000 mortgage interest leaves £5,000 in cash profit. But for tax purposes in 2019/20 only 25% of the mortgage interest is available for tax relief at their marginal rate so the tax calculation is £10,000 - £1,250 mortgage interest = £8,750 x 40% = £3,750 less mortgage credit £750 (£3,750 x 20%) = £2,750 tax due. The tax rate on profit is now 55% and will increase to 60% from April 2020 onwards.

He thinks about selling the property, but £10,000 is a good rent for the cost of the property so he is loathed to sell as the net income is still a good return.

But selling the property David used to live in, might be a better idea as the tax on this is due to increase substantially, so we look at the tax position on a sale before and after 5 April 2020.

Example 2: Capital gain on house sale before April 2020

The 15 years of actual occupation as main residence from 1990 – 2005 is exempt plus the last 18 months of ownership meaning £55,000 of the £100,000 is exempt. 

Lettings relief also exempts a further amount equal to the lower of £40,000 or the exempt gain. Which is £40,000 in this example leaving just £5,000 of the gain liable to tax which would likely be covered by their annual exempt amount of £12,000 in 2019/20.

Example 3: Capital gain on house sale after April 2020.

15 years of actual occupation as main residence, but only the last 9 months of ownership will be exempt meaning just £52,500 of the gain will be exempt. Lettings relief will not be available at all after April 2020 leaving £47,500 of the gain liable to tax. 

Even after capital gains tax annual exempt the additional tax on a sale would be £9,940

David purchased the house he now lets out in 1990 for £50,000. They lived in the property until 2005 when their son was 5 then moved to the new house, near a better school. Since 2005 he has let his old house. It is now worth £150,000, a gain of £100,000. 

The tax charges arising on properties are changing rapidly as legislation becomes effective, deciding whether to hold or sell is an investment decision, but the tax differentials can be substantial and the removal of lettings relief can cost an individual an additional £11,200 on the sale of a let property after April 2020 or £22,400 extra tax for a couple. In our example we have treated the property as being solely owned by David for simplicity.

If you would like to know more about how you might mitigate your tax liabilities on property income or any other tax or financial matters please contact or call 0147365977 to arrange a free no obligations meeting to discuss how we can help you.