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Accidental landlords face increased tax bills

The private rental sector looks set to be hit with yet more changes to taxation.

This time it will be at the expense of those who have become landlords by chance rather than as a commercial venture.

Some may have inherited property or found themselves in a position where they have had to relocate, but were unable to, or decided not to sell their current property.

Keeping the property as a safety net might not have been such a good decision under new government plans to scrap two kinds of tax relief from 6 April 2020.

Where you sell an investment property (one bought as a buy-to-let) you will pay capital gains tax on any profit you make from the sale above the annual threshold (currently £12,000). This equates to between 18-28 per cent, depending on your tax bracket.

However, if the property was once your main home you only have to pay tax on the amount the property value increased between you leaving the property and selling it.

At the moment, landlords are able to add 18 months on to the length of time they lived at the property. For example, if you owned the property for two years, living in it for the first year and renting it out for the second, the tax calculation is based on you having lived there for two-and-a-half years.

Under the new government proposals, this benefit, which is part of the relief known as principal private residence relief, will be cut to nine months.

A further blow will come in the form of reduced lettings relief.

If you sell your former home after renting it out, currently you can protect £40,000 or £80,000 for couples, from capital gains tax.

From next April only landlords that lived in the property with their tenants will be able to claim this benefit.

There could also be a further headache in store if you are tied into a fixed-term mortgage that ends after April next year. If you decide to sell the property to avoid the impact of the tax changes, you could be hit by hefty early repayment charges.

Property solicitor, Michael Steele, advises: “If you have become a landlord by circumstance, you should take advice from both your solicitor and financial advisor as soon as possible so that you are fully aware of the legal and financial requirements and implications of being a landlord.”

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