Sarah Bradford explains how lettings relief can reduce a taxable gain on let property that has been your main residence at some point.
Full private residence relief means that there is no capital gains tax to pay if you make a gain on the sale of your home. However, the availability of the relief is subject to conditions, and if these are not met throughout the period of residence there may be some tax to pay. In particular, this may be the case if the property has been let out.
Private residence relief conditions
Private residence relief is available in respect of the disposal of a property, or part of a property, that has been used as the owner’s only or main residence at some point during the period of ownership. If the property has been the only or main residence throughout the whole period of ownership, any gain is fully sheltered by the relief.
If the property has not been the only or main residence throughout the period of ownership, some of the gain may be taxable. However, as long as some private residence relief is due, the final 18 months of ownership are exempt.
Married couples and civil partners can only have one main residence between them for the purposes of the relief. Where an individual or a couple have two properties that they occupy as a residence, they can elect which property is their main residence for the purposes of the relief.
Letting out your home
As noted above, with the exception of the last 18 months of ownership (and certain job-related absences), private residence relief is only available for periods for which the property is occupied as the main home. If the property is let out, this condition is not met and, at first sight, relief is not in point.
However, there is a difference between letting out a property which has never been occupied as a main home (such as buy-to-let property) and letting out a property that has at some point been the owner’s main home. That difference is lettings relief. A property which has only ever been let and which has never been occupied as a home cannot qualify for private residence relief and as such any gain on the property will be liable to capital gains tax.
By contrast, if the property has been occupied as an only or main residence, private residence relief will be available for the period for which it was so occupied and also for the last 18 months of ownership. The taxable gain attributable to the let period may, in this instance, be further reduced by lettings relief.
Lettings relief provides an element of additional relief where part of the gain on the disposal of a residential property is taxable because the property has been let out during the period of ownership. The relief is only available if the property has at some point been the only or main residence, and private residence relief is available in respect of part of the gain.
The amount of lettings relief is the lowest of:
Example 1: Lettings relief £40,000
James bought a flat on 1 September 2006 for £180,000. He lived in it as his main home for three years. He then moved in with his girlfriend, letting out the flat for seven years until he sold it on 31 August 2016 for £285,000. Costs of acquisition and sale were £5,000.
Before taking account of any available reliefs, James realises a gain of £100,000 (£285,000 – (£180,000 + £5,000)).
The property was James’ only or main residence for three years and qualifies for private residence relief for this period. Further, the last 18 months of ownership are also exempt, bringing the total period qualifying for private residence relief to four and half years.
The gain eligible for private residence relief is therefore £45,000 (£100,000 x 4.5/10).
The remaining gain of £55,000 is attributable to the letting and does not qualify for private residence relief.
However, lettings relief is available. The amount of the relief is the lowest of:
Letting relief is therefore £40,000.
The computation of the gain in Example 1 is as follows:
Sale proceeds 285,000
Less: cost of property £180,000
costs of acquisition and sale £5,000
Less: private residence relief (3 years plus last 18 months) (£45,000)
Gain attributable to letting £55,000
Less: lettings relief (£40,000)
Chargeable gain £15,000
Although the property was let for seven years, the availability of lettings relief reduces the chargeable gain to £15,000.
Married couples and civil partners – double the relief!
Although married couples and civil partners are only allowed to have one main residence between them for the purposes of private residence relief, when it comes to lettings relief they are treated as for other joint owners of a property and each person is entitled to lettings relief in full.
The approach is to work out the relief separately by reference to each person’s gain, rather than by reference to the property as a whole. This is valuable, as it means that a couple can benefit from lettings relief of up to £80,000 when they dispose of a property which has been their only or main residence at some point, and which has also been let out.
Example 2: Lettings relief £80,000
Helen and Tony are a married couple. They bought a property in 2011 for £500,000, which they lived in as their main residence for two years, after which the property was let out for three years before being sold for £860,000. Costs of acquisition and sale were £10,000.
Helen and Tony are each liable for capital gains tax on their share of the gain.
As the property was lived in as their main residence, private residence relief is in point. The property was owned for five years, during which they lived in at as their home for two years. The last 18 months of ownership are also exempt. Consequently, private residence relief is available in respect of the gain that is attributable to three and a half years of ownership.
As the property was let as a residential let, lettings relief is also available.
The computation of the gain and the available reliefs is as follows:
Total Helen Tony
£ £ £
Sales proceeds 860,000 430,000 430,000
Less: original cost (500,000) (250,000) (250,000)
Costs of acquisition and sale (10,000) (5,000) (5,000)
350,000 175,000 175,000
Private residence relief (3.5 years) (245,000) (122,500) (122,500)
Gain attributable to letting 105,000 52,500 52,500
Less: lettings relief (per individual):
Chargeable gain £25,000 £12,500 £12,500
Helen and Tony both have a chargeable gain of £12,500 in respect of the property. The availability of lettings relief reduces the total chargeable gain in respect of the property by £80,000.
Where a married couple or civil partners make a gain on a property which has been let out but which has been their main residence at some point and thus qualifies for private residence relief, each individual is entitled to the full amount of lettings relief in respect of their share of the gain. Couples can therefore benefit from lettings relief of up to £80,000.
No minimum period of ownership
To qualify for lettings relief, the property must have been lived in as an only or main residence at some point and qualify for some private residence relief. There is, however, no minimum period of ownership, so where possible it makes sense to occupy a property which has been let as residential accommodation as a main residence for a period of time. The occupation of a main residence can be before or after a let, or between lets.
Lettings relief is a valuable relief and for a couple can reduce the chargeable gain by up to £80,000. Where possible, a let property should be occupied as a main residence at some point to secure entitlement to lettings relief.
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