Buy to Let & Second Home Owners

The Government is cutting Capital Gains Tax relief on the sale of buy to let and additional properties from 2015.

This announcement is one of those ‘blink and you’ll miss it’ affairs in which the Government announced the halving of a tax break for people who own more than one home.

The policy is designed to crack down on the practice of “flipping” second homes in order to reduce the amount of Capital Gains Tax (CGT) paid.

How “flipping” works

Flipping is where buy-to-let landlords or second home owners tell HMRC a property they own other than their main home has now become their primary residence, usually for a very short period. They then “flip” back their main home for tax purposes to the home they actually live in. Technically you can flip homes as often as you want.

The reason people do this is to try to take advantage of Private Residence Relief, which allows the sale of the property to be exempt from up to three years of CGT if it has been a person’s main home at any point.

Flipping was one of the major scandals of the MPs’ expenses investigations, with many MPs changing their main residence multiple times to benefit from this relief.

So what’s been announced?

The Private Residence Relief period is now being halved to 18 months. Experts, however, are warning this could have the unintentional knock on effect of hitting people who divorce or whose circumstances change, but cannot sell their main home quickly.

The proposal will come into affect from April 2015, following a consultation next year on how it should be implemented.

The Treasury estimates the change will produce an increase of £65 million in CGT receipts for the 2015/16 tax year, £90 million the year after, and rising to £105 million in 2018/19.

Property commentators say the change in the rules could lead to a surge of homes being put up for sale.

Should buy to let landlords face further changes?

A recent report by the Intergenerational Foundation, a think tank group, estimates that the allowable expenses buy to let landlords’ offset against rent is around £3-5 billion each year.

It is particularly critical of the “wear and tear allowance”, where buy to let landlords are allowed to claim back 10% of their net rental income to cover depreciation of the fixtures and fittings when they let a furnished property . The Intergenerational Foundation is calling for this to be abolished.

In the report, which was issued prior to the Autumn Statement, it also asked for Private Residence Relief to be cut back to six months.

What do you think? Should people with more than one home see their reliefs scaled back even more? Please let us know your thoughts.

This article aims to give information, not advice. Always do your own research and / or seek out advice from a regulated broker, before acting on anything contained in this article.

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Post courtesy of Love Money.