Where a property has been occupied as the taxpayer’s only or main home, private residence relief is available on any gains arising on disposal of the property (through sale or otherwise).
Private residence relief is restricted where a property has not been the only or main residence throughout the period of ownership. If, however the property has been the only or main residence at some point, the gain attributable to the last 18 months of ownership is (on a time apportioned basis) exempt even if the property was not occupied as the main residence during that period.
Where a property is let, private residence relief is not available for the let period as the property is not occupied as the taxpayer’s only or main residence. Despite this, lettings relief is available which is another little known relief that in some cases can drastically reduce the taxpayer’s capital gains tax bill.
To enjoy lettings relief you must have occupied the let property as your only or main residence at some point as you would in the case of private residence relief.
Lettings relief is calculated as the lowest of the following:
1 the amount of private residence relief
2 £40,000 and
3 the amount of the chargeable gain arising as a result of the letting.
Taking an example of Jack who purchased his property on 1st March 2008 for £100,000 and lived in it for 1 year until he let it out. Jack owned the property for exactly 10 years until he sold it on 28th of February, 2018 for £165,000 with a £65,000 chargeable gain (Assumption: no improvements)
The first 12 months are exempt plus as he actually occupied the property at some point, he benefits from a deemed private residence relief exemption for the last 18 months. Therefore 30 months of 120 are exempt meaning 30/120*£65,000 = £16,250 of the £65,000 gain is exempt from capital gains tax. The gain attributable to the remainder of the gain is not eligible for private residence relief ie £48,750.
The additional ‘lettings relief’ will be the lesser of:
1 £16,250 – the gain qualifying for private residence relief:
2 £40,000; and
3 £48,750 – the gain attributable to letting
Therefore, the lettings relief of £16,250 is available. If Jack is a basic rate taxpayer and all of the taxable gain falls within the basic rate band (considering all his other taxable income) the CGT he must pay is as follows:
Gain on sale – £65,000
Less: private residence relief – (£16,250)
Less: lettings relief – (£16,250)
Chargeable gain – £32,500
Less: annual exempt amount – (£11,300)
Taxable gain – £21,200
Capital gain tax owing @ 18% – £3,816
Many taxpayers, unaware of lettings relief, would lose £2,925 in tax in this example if they tried to attempt the calculation themselves when, for a fraction of this amount, they could have employed the services of an accountant and used the difference to sun themselves on a desert island!
Be smart and ‘stick to your knitting’!