Although new capital gains tax rules could cost some landlords thousands of pounds when they sell up, property is still a relatively safe long term investment, according to a leading property investment firm.
Some landlords could see their costs spiral when they sell their former home after new capital gains tax rules were confirmed by HM Revenue and Customs.
Measures announced earlier this year to curb private residence relief for landlords who once lived in their rental property will now come in from April 2020.
Currently, homeowners who previously lived in a property but went on to let it out can claim capital gains tax relief on property sales for up to 18 months after they move out. From April next year this will be reduced to nine months.
The tax grab is expected to affect up to 500,000 so-called accidental landlords, according to accounting firm RSM.
Any profit made on an investment property is subject to capital gains tax when it's sold.
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% in tax on the gain.
A higher-rate taxpayer would have to pay 28% on the gain.
If a landlord rents out a property that was once their main home, capital gains tax only applies on the amount the home went up in value while they were not living there.
But the government earlier this month announced that the amount of time they lived at the property – known as the ‘final period exemption’ – will be reduced from 18 months to nine months.
The tax break was originally designed to help those who had to move for work and were either unable to sell their home or chose to rent. For many years it stood at 36 months, but this was cut to 18 months in 2014.
Brian Slater, from the Chartered Institute of Taxation, said: “Many home owners are still unaware that the final period exemption was reduced from 36 months to 18 months in 2014.
“A further reduction to just nine months is likely to bring more property disposals within the scope of capital gains tax.”
However Andy Foote, director of SevenCapital, is keen to remind buy-to-let landlords that investing in property remains a long-term investment.
He said: “Property, now more-so than ever, is a long-term investment if you’re looking to reap significant reward. So, whilst this new rule on capital gains tax relief will mean that the term you are taxed on is greater, in reality if you’re investing for 10-15 years plus and you’ve invested well, it should only mean a slight reduction on the overall profit of your investment when you come to sell.
“Whilst no one wants to pay more tax then they believe they should, nine months against another 20 years worth of profit from an investment, really pales into significance.
“Property remains a solid investment as long as you’re investing well and are prepared to wait – that means a good quality and relevant type of property, in the right area, at the right time and, importantly, for a long time.
“What is likely to be of more concern is the cutting back on lettings relief from April next year. Unless the government communicates its changes clearly and visibly to landlords, I imagine there will be a number who, unaware of the new changes – which mean the scrapping of lettings relief for all non-live-in landlords – could be hit with a hefty and unexpected tax bill.”