Making The Most Of Lettings Relief

Sarah Bradford explains how lettings relief may reduce the chargeable gain on a property that at some time has been the taxpayer’s only or main residence.

Private residence relief is available where a property has been occupied as the taxpayer’s only or main home. Where the property has been the only or main residence throughout the period of ownership, any gain arising on the disposal of the property (by sale or otherwise) is generally free of capital gains tax (CGT).

The relief is restricted where the property has not been the only or main residence throughout. However, if the property has been the only or main residence at some point, the gain attributable to the last 18 months of ownership (on a time-apportioned basis) is exempt, even if the property was not occupied as the main residence during that period. For example, this may be the case if a person completes on a new home and moves into it before the sale of the former home has completed.

Letting the property

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. However, the availability of private residence relief is not compromised where a lodger lives with the owner who occupies the property as his or her only or main residence. Likewise, private residence relief is not lost if rooms are occupied by parents or children of an owner occupying the property as his or her main home, even if they have exclusive use of certain rooms and/or pay for board.

The situation is, however, very different if the owner does not live in the property and lets it out. If the property has been let throughout the period of ownership and has never been occupied as an only or main residence, no private residence relief is available and any gain arising on the sale of the property is chargeable to CGT. The higher residential rates of CGT will apply and, once the annual exemption has been utilised, the gain will be taxable at 18% to the extent that income and gains fall within the basic rate band, and at 28% thereafter.

Example 1: No relief due

Josie brought a buy to let property on 1 March 2008, letting the property from completion until January 2018, when she decided to sell the property. The sale concluded on 28 February 2018, and Josie realised a chargeable gain of £65,000.

As she had never occupied the property as her only or main residence, private residence relief is not available and the gain is chargeable in full.

Josie is a higher rate taxpayer for 2017/18 and has not used her CGT exempt amount elsewhere.

The chargeable gain after deducting the annual exempt amount (£11,300 for 2017/18) is £53,700. This is taxed at 28%, generating a capital gains tax bill of £15,036 (£53,700 @ 28%).

Lettings relief

Occupying the let property as the only or main residence at some point during the period of ownership not only shelters the gain relating to the period for which the property was occupied as the main residence (and also that relating to the last 18 months of ownership), it also opens up the possibility of claiming lettings relief to further reduce the chargeable gain.

Lettings relief is available where a gain arises on the disposal of a property which:

at some time has been the individual’s only or main residence;
during the period of ownership, all or part of the property has been let as residential accommodation; and
a chargeable gain arises as a result of the letting.

The amount of the relief is the lowest of the following three amounts:

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.

Example 2: Lettings relief due

Assume the facts are as in Example 1, but that Josie lived in the property as her only or main residence for the first year that she owned it, letting it out from 1 March 2009.

As she lived in the property as her only or main residence, private residence relief is available for both the 18 months in which she occupied the property and also the final 18 months of ownership – a total of 36 months.

As noted in Example 1, the gain arising on the sale of the property was £65,000.

Josie owned the property for ten years (120 months).

Private residence relief is available in respect of 36/120ths of the gain, i.e. £19,500 (£65,000 x 36/120).

The gain attributable to letting is the remainder of the gain not eligible for private residence relief, i.e. £45,500 (£65,000 - £19,500). This is equivalent to 84/120ths of the gain.

Lettings relief is available as the conditions for relief are met. The amount of lettings relief is the lowest of:

1. £19,500 – the gain qualifying for private residence relief:

2. £40,000; and

3. £45,500 – the gain attributable to letting.

Therefore, lettings relief of £19,500 is available.

Josie must pay CGT of £4,116, calculated as follows.

Gain on sale £65,000

Less: private residence relief (£19,500)

£45,500

Less: lettings relief (£19,500)

Chargeable gain £26,000

Less: annual exempt amount (£11,300)

Taxable gain £14,700

Capital gains tax @28% £ 4,116

The availability of private residence relief and lettings relief has reduced the tax payable by Josie from £15,036 to £4,116 – a saving of £10,920.

Planning considerations

To bring lettings relief to the table, the property must be occupied as the only or main residence at some point during the period of ownership. It does not matter when this period of occupation as the only or main residence occurs, just that it does. The period of residence can be before the property is let for the first time, after the final let prior to sale or between lets; what is crucial is that there is such a period, not when such a period occurs.

The next point to note is that there is no minimum period during which the owner needs to live in the property to bring private residence relief into play – what is important here is the quality of occupation rather than the length of occupation. The residence must be occupied as such and there must be indication of the property being occupied as a home, rather than as temporary accommodation. Whether the test is met will depend on the circumstances surrounding the occupation. For example, if someone buys a property to live in whilst they are single, lives in it for a year, then move in with a new partner, letting out their former home, HMRC are likely to accept that the property was lived in as an only or main residence. By contrast, if a property was purchased as a buy-to-let investment, and only occupied as a main residence prior to sale once it had been put on the market, HMRC may ask questions. Some planning ahead is therefore essential to ensure the quality of occupation is such to secure both private residence relief and also lettings relief.

Although any amount of qualifying occupation will trigger the availability of some private residence relief, the longer the period of occupation, the greater the private residence relief and potentially the amount of the lettings relief that will be available. There is, however, a balance to be had between securing additional relief and rent lost while the property is occupied as a main residence.

A further complication can arise if the property is used for business purposes. Any gain related to business use remains chargeable, and where there is a period of business use, this must be considered in working out the gain attributable to letting.

Practical Tip:

Lettings relief is potentially valuable – consider occupying a property that has been or will be let as a main residence to secure the availability of both private residence relief and lettings relief.