LETTINGS RELIEF – TRIPS AND TRAPS
Lettings relief is a valuable relief that may reduce the capital gains tax (CGT) payable on the sale of 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.
EXAMPLE – 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 2015 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 72/120ths of the gain, i.e. £84,000.
Consequently, the gain remaining in charge is £56,000.
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),
The gain on sale is therefore computed as follows:
Sales proceeds 260,000
Less: cost - 120,000
Lettings relief + 40,000
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.
In order to minimise future capital gains tax it is important that you consider a PPR election and plan effectively. For further information on how I can assist with your personal situation, please contact me firstname.lastname@example.org 01270 626162 www.howardworth.co.uk.