Govt’s changes to capital gains tax to hurt homeowners

The changes government has made to capital gains tax is likely to be detrimental to second homeowner and small landlords, experts have argued.

In yesterday’s Finance Bill 2019-20, the government confirmed an amendment in capital gains tax rules limiting the extra amount of private residence relief second home owners are entitled to, as previously announced in 2018’s Budget.

Private residence relief is a reduction in capital gains tax and includes circumstances where a homeowner acquires a second home and retains their initial property for rental purposes after moving to a new home.

Under the existing rules, the exemption is the amount of time spent living in the property with an additional 18 months of relief on top.

Currently, this amount has been calculated as a percentage of the price the property was sold for and this part is tax exempt.

However, changes from government will limit the additional relied to just nine months – cutting the period in half.

While the changes may seem minor, speaking to MoneyAge, Quilter financial planning expert Gordon Andrews argued that it could mean affected individuals pay “thousands of pounds in additional tax”.

Andrews added: “The government expects to net an additional £570m over the next five years in additional tax revenues as a result of this change. It means that owning a second home becomes slightly less profitable for those that rent a property they previously lived in.”

The Quilter financial planning expert highlighted that many individuals tend to hold onto a flat when they upgrade to a larger family home, in the hope that they can continue to hold it as a buy-to-let and eventually cash-in by selling the property and capturing a profit from rising house prices.

Although, the recently announced changes make this “slightly less attractive”, he said.

Despite individuals experiencing negative repercussions from the amendments, married couples will see some benefits.

“Where a spouse or civil partner inherits a second home on the death of their partner, the relief will now be transferable. They would previously have been entitled to no relief unless they have lived in the property themselves,” Andrews explained.

The changes unveiled are just one in a string of tax shake-ups that have hindered landlords and follow the introduction of a further 3 per cent stamp duty surcharge on second homes and cuts to mortgage interest tax relief.

Furthermore, the government also revealed that around 170,000 self-employed workers will pay higher tax rates from April 2020, as it has decided to expand IR35, the off-payroll working rules, to the private sector.

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