Private Residence Relief and Lettings Relief to reduce CGT

simon

Simon Misiewicz

10th June 2020

What is Private Residence Relief (PRR)?

You may be interested in our main article “buy to let tax for UK landlords”. This article discusses all the different types of tax that you need to be aware of as a UK landlord.

If you wish to know the basics of Capital Gains Tax and annual CGT annual allowances be sure to read this article first.

“How long do I need to live in a property to avoid paying Capital Gains Tax?” This is a common question. You do not pay tax for the period that you have lived in the property. This is just one of many ways to reduce capital gains tax on property transactions.

You may have purchased a home to live in but later move into a new home but rent out the original house. This results in a potential CGT liability. You do not pay CGT on a property that is your main residence. This is important to know when working out your gain.

HMRC’s very own website provides the below summary of the periods that you are absent from the property. These periods will still qualify for Private Residence Relief

  • The time that you lived in the property as your main and only residence
  • The final 18 months of your period of ownership always qualify for relief. This is regardless of how you use the property in that time
  • 12 months you do not occupy your new home when you acquire it because you are not able to sell the old home
  • 12 months you do not occupy your new home because you are waiting for the refurbishment  of the new property to be completed

Other qualifying absences to increase your Private Residence Relief to further reduce Capital Gains Tax

There are other qualifying absences during the time that you owned the main residence as listed below

  • a. absences for whatever reason, totalling not more than 3 years in all
  • b. absences during which you’re in employment and all your duties are carried on outside the United Kingdom (UK)
  • c. absences totalling not more than 4 years when
    • the distance from your place of work prevents you living at home, or
    • your employer requires you to work away from home in order to do your job effectively

An example of how Private Residence Relief reduces your Capital Gains Tax liability 

You can follow this example or work out your own Capital Gains Tax liability by using our very own calculator tool. Using the same example as above we can see

£200,000 sales price

(£100,000) purchase price and capitalised refurbishment costs

£100,000 profit

(£83,333) Private Residence Relief

(£40,000) Lettings Relief (see below)

(£123,333) total reliefs

The reliefs outweigh the capital gain. No tax bill will arise.

Download your buy to let tax guide here, written by our property accountants

 

PRR From April 2020

One of the big changes was the reduction of deemed residence from 18 months as shown in the above example to 9 months. It will be deemed that the person lived in the property for the first year plus nine months. This means that the person would be deemed to have lived in the property for 1 3/4 years. As such the amount of Private Residence Relief will also be reduced.

Let us see how much this change will have on a high rate taxpayer:

£200,000 sales price

(£100,000) purchase price and capitalised refurbishment costs

£100,000 profit

(£58,333) Private Residence Relief

(£40,000) Lettings Relief (see below)

(£98,333) total reliefs

£1,644 gains that become taxable.

A basic rate taxpayer will pay 18% of this gain. A high rate taxpayer will pay 28% of this gain. This means that the buy to let landlord will have a £460.32 tax bill to pay.

Lettings relief (LR) when selling an investment property

You can reduce capital gains tax on a property through Lettings Relief. Before April 2020 letting relief was the lower of the three below elements. This is provided that you let the property during your ownership of the property investment.

  • The capital gains (sales price less purchase & refurbishment costs)
  • Private Residence Relief (PRR) as above
  • £40,000

The lettings relief could not create a negative for you to reclaim tax back from HMRC. You may have lived in a property but moved out. You may have moved a tenant into the property and qualify for the lettings relief.

Lettings Relief and tax changes from April 2020

Another significant change was the amendment to the lettings relief. From April 2020 that lettings relief will only be provided if you lived with the tenant. Sarah previously received the Lettings Relief benefit. From April 2020 she would not receive this benefit as she moved out and a tenant subsequently moved in. Sarah did not live in the property at the same time as the tenant.

Example of Lettings Relief and how it reduces capital gains tax

Let us see how much of an impact the removal of Lettings Relief will have on the above example

£200,000 sales price

(£100,000) purchase price and capitalised refurbishment costs

£100,000 profit

(£58,333) Private Residence Relief

£41,667 gains that become taxable.

As a high rate taxpayer that has used up their annual capital gains tax allowances. They will have a tax at 28% of £11,666.76

Our property accountants and property tax advisors are always on hand to help our clients. The sole aim is to build their wealth whilst paying less tax on their buy to let portfolios.

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