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Capital gains tax – lettings and private residence relief

In my last blog I spoke about calculating capital gains tax on single and multiple assets, and factoring in losses and deductions. This time, I’ll talk about two types of tax relief that are occasionally available to buy to let landlords – private residence relief and letting relief.

People whose property was their main or only home, and who only used it as their home, usually don’t have to pay capital gains tax. This is known as ‘private residence relief’. However, letting relief exists for landlords who have at any point lived in the property that they’re selling, and such landlords can in some cases be eligible for a portion of the private residence relief too.

The amount of letting relief available is capped at £40,000, and is either that figure, the amount of private residence relief due, or the gains made on the part of the property you let for the time that you let it (whichever of the three is lowest).

In addition, if you lived in the property as your main home, the final three years before you sold it always qualify for private residence relief.

This is pretty confusing, so let’s revisit the example from my last blog – in which we calculated tax on a £50,000 profit – in three different scenarios:

Scenario one: you let the entire property for the entire time you owned it

The letting relief would be the lower of:

  • £40,000
  • £0 (private residence relief due)
  • £50,000 (the gains made)

This option is simple, no matter the numbers; as the property was never your main home, you don’t qualify for either type of relief.

Scenario two: you let the entire property for some of the time you owned it

Say you lived there for two years and let it out for the remaining eight. The first two years qualify for private residence relief, as do the final three, so only five out of ten years are ‘exposed’. The letting relief would then be the lower of:

  • £40,000
  • £25,000 (private residence relief)
  • £25,000 (the gains made during the time the property was let)

In this case, you’d qualify for £50,000 – the total of the private residence relief and the letting relief due. This rather neatly means you wouldn’t pay any capital gains tax at all. Even if you did still have some to pay, however, if you could prove to the taxman that moving home and letting it out was unavoidable – for instance, if you had to relocate for a job – you might be able to qualify for full relief regardless.

Scenario three: you let out part of the property

Now assume that you let out three quarters of the property and continued to occupy the remaining quarter yourself.

You’d still qualify for private residence relief for the part of the property you lived in. In the meantime, letting relief would be the lower of:

  • £40,000
  • £12,500 (private residence relief)
  • £37,500 (the gains made on the part of the property you let)

Your lettings and private residence relief would both be £12,500, and after deducting the £10,900 allowance, only £14,100 of your capital gains would be taxable.

In summary

In short, tax is taxing. It’s never as clear-cut as the examples given above, and even they might have been a bit of a headache. If you’re in any doubt whatsoever, I recommend seeking out a chartered accountant to help you.

In the meantime, you can find more information on capital gains tax at the HMRC website, and read more about buy to let tax law in our expert guide to tax.

Now, where’s the paracetamol?

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Amelia Vargo is an online marketing executive for CT Capital. Amelia writes for Turnkey Mortgages, Turnkey Landlords, TurnKey Bridging, TurnKey Life and Commercial Trust.