HMRC state that the private letting relief can be used where:
- you sell a dwelling house which is, or has been, your only or main residence, and;
- part or all of it has at some time in your period of ownership been let as a residential accommodation.
The amount of private letting relief that can be claimed cannot be greater than £40,000, and it must be the lowest of the following three values:
- £40,000;
- the amount of private residence relief that has already been claimed;
- the amount of any chargeable gain that is made due to the letting; that is, this is the amount that is attributed to the increase in the property value during the period it was let.
The use of this relief is best illustrated via the following case study:
Private Letting Relief
Roger buys a three-bedroom semi-detached house in North Wales for £50,000 in 1990.
He lives in the house for two years and then decides to move to a bigger four-bedroom detached house. He rents out the three-bedroom house for the next five years.
In 1997 he sells the three-bedroom house for £120,000. This means that he has made a capital gain of £70,000.
5/7ths of the profit is exempt from Capital Gains Tax (CGT) because he is able to claim partial residence relief (two years PPR and the 36-month rule (which has changed to 18 months since the events in this case study took place)).
This means that he is only liable to pay CGT on the remaining £20,000 of chargeable gain. However, Roger is also able to claim private letting relief, and the amount he can claim is the lower of the following three values:
- £40,000;
- amount of private residence relief already claimed is £50,000;
- amount of any chargeable gain that is made due to the letting is £20,000 (assuming that property increased by £10,000 in each of the two years that the property was let).
This means that Roger is allowed to claim private letting relief of £20,000 as this is the lower of the three values.
Therefore the outstanding chargeable gain of £20,000 is cancelled out by this relief, which means that he has absolutely no CGT liability.
In other words, Roger has made a tax-free capital gain of £70,000 just by having lived in a property for two years!
Make sure you consider CGT before you decide to sell your property!
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