Lettings Relief – Tips And Traps

Lettings relief is a valuable relief that may reduce the capital gains tax (CGT) payable on the sale of a property, which was at some point used as the taxpayer’s only or main residence, and which has also been let as residential accommodation.

Many people are familiar with the concept of private residence relief. This relief ensures that no CGT is payable on any gain that is made on a property, which throughout the period of ownership has been the taxpayer’s only or main residence.

However, if the property has only been the taxpayer’s only or main residence for part of the period of ownership, or if part of the property has been used otherwise than as the taxpayer’s main residence, the amount of private residence relief is reduced, meaning that part of the gain may be chargeable to CGT. In working out the amount of private residence relief in respect of a property that has at some time been the taxpayer’s only or main residence, the last 18 months of ownership are counted as a period during which the property was the taxpayer’s only or main residence.

There are many scenarios in which a person may choose to rent out a property, which was once his or her main residence. For example, a person may decide to travel and let out his or her property whilst away. Alternatively, a couple may move in together and keep one of their former properties as a buy-to-let investment. In situations such as these, lettings relief may be available on the eventual sale of the property.

What is lettings relief?

Lettings relief reduces the amount of the gain brought into charge on the disposal of a property, which at some time during the period of ownership has been the taxpayer’s only or main residence and part or all of that property has at some time during the period of ownership been let as residential accommodation. The relief broadly applies where:

a gain accrues to an individual in respect of which private residence relief is available;
part or all of the property has at some time during that individual’s period of ownership been let as residential accommodation; and
a chargeable gain arises by virtue of the letting.

The amount of the relief is the lower of:

the amount of private residence relief available in respect of the letting;
£40,000; or
the amount of the gain arising by reason of the letting.

Step 1 – Work out the private residence relief

In determining the amount of lettings relief that may be available, the first stage is to work out the private residence relief. In a simple case where, for example, the property is lived in for a number of years and then let out a residential accommodation, the amount of private residence relief is determined by apportioning the gain by reference to the period it was used as the taxpayer’s main residence.

Trap:

Don’t forget to treat the final 18 months of ownership as qualifying for relief.

Example 1 – Computing PPR

Harry purchased a property on 1 January 2005 for £120,000. He lives in the property until 30 June 2009. He then lets the property out until it is sold for £260,000 on 30 December 2014.

In total, Harry owned the property for 10 years (120 months).

Private residence relief is available for the period in which he lived in the property as his main residence, i.e. the period from 1 January 2005 until 30 June 2009 (54 months) and also the final 18 months (i.e. 1 July 2013 to 30 December 2014) – a total of 72 months.

On selling the property Harry makes a gain of £140,000 (I.e. £260,000 - £120,000).

Private residence relief is available in respect of 72/120^thsof the gain, i.e. £84,000.

Consequently, the gain remaining in charge is £56,000.

Step 2 – Work out the gain attributable to letting

In a simple case, as in the example above, where a property has only been used as the taxpayer’s only or main residence or let out a residential accommodation, the gain arising by reason of the letting is simply that portion of the gain that is not exempt from charge by virtue of private residence relief. In the example above, the gain attributable to letting would be £56,000.

However, the position can become more complicated if the property has also been used for other purposes, for example if part of the property has been used exclusively for the purposes of a trade. In this scenario, it is necessary to apportion the gain after PPR to the letting and the business use.

Step 3 – Work out the lettings relief

The next step is to work out the lettings relief. This is the lower of the private residence relief and the gain attributable to the letting, capped at a maximum of £40,000.

Example 2 – Computing lettings relief

Harry, from the example above, is entitled to lettings relief equal to the lower of:

£84,000 (the private residence relief);
£40,000; and
£56,000 (the gain attributable to letting), i.e. £40,000.

The gain on sale is therefore computed as follows:

£ £

Sales proceeds 260,000

Less: cost (120,000)

140,000

Private residence relief 84,000

Lettings relief 40,000

(124,000)

Chargeable gain 16,000

The availability of the lettings relief reduces the chargeable gain to £16,000. Assuming Harry still has his annual exempt amount available (£11,100 for 2015/16), he will be taxed on a gain of £4,900. If he is a higher rate taxpayer, he will pay capital gains tax of £1,372 (28% of £4,900). As he only actually lived in the property for 45% of the time that he owned it, this is a good result.

Tip

Living in the property as a main residence for a short while can be beneficial as it opens up the possibility of claiming lettings relief as well as ensuring the final 18 months of ownership are exempt.

Mixed use

Lettings relief is also available where a part of the property is used as the taxpayer’s only or main residence and part is let out for residential use. The gain is apportioned by reference to the proportion of the house used for each purpose. The computation of the lettings relief follows the same formula as set out above.

Example 3 – Lettings relief and mixed use

Lucy purchased a property on 1 January 2010. She sold the property on 30 April 2015, realising a gain of £100,000. Throughout the period of ownership, Lucy lived in 65% of the property as her only or main residence, and let out the remaining 35% for residential use.

As she did not occupy the whole property as her only or main residence, private residence relief is restricted. However, she is able to claim lettings relief.

The gain on the property is £100,000. As she occupied 65% of the property as her only or main residence throughout her period of ownership, she is entitled to private residence relief of £65,000 (being 65% of £100,000). The gain attributable to the letting is the remaining gain of £35,000.

As she has let the property for residential use, she is entitled to lettings relief. This is the lower of:

£65,000 (the private residence relief);
£40,000; and
£35,000 (the gain attributable to letting),

i.e. £35,000.

The gain on sale is therefore reduced to nil.

£ £

Gain on sale 100,000

Less: private residence relief 65,000

Lettings relief 35,000

(100,000)

Chargeable gain Nil

Practical tip

Lettings relief is available where all or part of a property is let for residential use as long as at least part of the property has been used as the taxpayer’s only or main residence for part of the period of ownership. Therefore, making the property the taxpayer’s main residence for part of the time to bring the gain within the ambit of lettings relief can be very worthwhile from a CGT perspective.