Lettings Relief For Property Capital Gains Tax

Published / Last Updated on 20/06/2019

Rent a Room Relief – rent a room/rent a share of your main home = Rental income up to £7,500 pa is income tax free

Let’s say you rent a room or say a third of your main home to a tenant under the rent a room relief scheme.

  • 2/3rds receives Principle Private Residence (PPR) relief i.e. not subject to capital gains tax
  • 1/3rd is now subject to Capital Gains Tax and Lettings Relief.

E.g.1. Lettings Relief Uncapped

  • You bought the property for £100,000 and it has remained your only main residence and at the same time took in a lodger renting 1/3rd.
  • You sell your home 9 years later for £190,000.
  • Total gain is £90,000 of which 2/3rds i.e. £60,000 profit is not chargeable to tax and
  • £30,000 profit is chargeable to capital gains tax unless you get Lettings Relief ...

What is Lettings Relief on Capital Gains Tax?

Lettings relief reduces the amount of the gain brought into charge on the disposal of a property.

The amount of the lettibngs relief is the lower of:

  • The amount of private residence relief available in respect of the letting.  In this case £60,000.
  • £40,000 or
  • The amount of the gain arising by reason of the letting.  In this case £30,000.

The amount of lettings relief is therefore £30,000.

Total Gain less Principle Private Residence relief (PPR) less Lettings relief = Taxable Gain (taxed at 18% or 28% depending upon whether the gain sits in your basic or higher rate tax income thresholds)

£90,000 less £60,000 less £30,000 = £0 Taxable Gain.

NO TAX TO PAY.


E.g.2. Lettings Relief Capped

You bought the property for £300,000 and it has remained your only main residence and at the same time took in a lodger renting 1/3rd.

You sell your home 9 years later for £500,000.

Total Gain is £200,000 of which 2/3rds i.e. £133,333 profit is not chargeable under PPR to tax and £66,667 profit is chargeable to capital gains.

The amount of the Lettings Relief is the LOWER of:

  • The amount of private residence relief available in respect of the letting.  In this case £133,333.
  • £40,000 or
  • The amount of the gain arising by reason of the letting.  In this case £66,667.

The amount of Lettings relief is therefore £40,000.

Total Gain less Principle Private Residence (PPR) relief less Lettings relief = Taxable Gain (taxed at 18% or 28% depending upon whether the gain sits in your basic or higher rate tax income thresholds)

£200,000 less £133,333,000 less £40,000 = £26,667 taxable gain.

CAPITAL GAINS TAX IS POTENTIALLY PAYABLE ON £26,667 after deduction of any unused personal capital gains tax yearly allowance.


LAW CHANGE: CHANGES To LETTINGS RELIEF (April 2020)

Before changes in April 2020, lettings relief is available even when you are not living in the property e.g. you have been travelling overseas for 12 months or moved into other rented accommodation for a few years.  Your main home is still your main residence and subject to both Principle Private Residence relief and Lettings Relief in full.

After April 2020, Lettings Relief is only available to landlords that share occupation of their home with a tenant at the same time.  In the above example, if you had moved out and rented in UK or overseas for any period i.e. no longer sharing occupation.  That period of unshared occupation with the tenant no longer counts towards Lettings Relief and only the ‘shared occupation’ proportion is allowed for Lettings Relief.


Related Videos


Videos Channels

Explore our Site

About
Advice
Money MOT
T and C