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  • Private residence relief explained

    When selling a property that is your second home or a property you let out, you may be entitled to pay capital gains tax. However, there are tax reliefs available for particular situations when selling a home for profit, such as private residence relief. 

    We look at how Private residence relief works and who is entitled to it.

    What is private residence relief?

    Private residence relief allows homeowners to sell their second homes that are let out without being liable for any capital gains tax on property profits.

    To benefit from private residence relief, the property must be your main home, or a dependent of yours has lived in the property.

    What is capital gains tax?

    Capital gains tax is a tax paid to HMRC on any profit when you sell or dispose of something (i.e., a house or another asset) that’s increased in value. It is the profit gain you make that is taxed and not the amount of money you receive.

    You pay Capital gains tax on:

    • Most personal possessions worth £6,000 or more, apart from your car
    • Property that’s not your main home
    • Your main home, if you let it out, use it for business, or it’s very large
    • Shares that are not in an ISA or PEP
    • Business assets

    Private residence relief is available for instances when selling a buy-to-let home, or the main home, that is occupied by tenants.

    Who is eligible for the relief?

    You are only eligible for the relief if you have the following.

    • It must be your main home or a dependent of yours who has lived in the property
    • If you have once lived in the property but are now renting it out
    • If you live in the property but have tenants

    You will not be eligible for private residents’ relief if you have purposely built the property to make a gain, for example, buying a property as an investment or to use it for business.

    If, however, you bought the property, have never lived in it or have never rented it to dependents, then you most likely won’t benefit from private resident’s tax relief and will have to pay capitals gains tax on any profit you have made on the property. You can find how much that will be on the government website.

    How you can calculate private residence relief

    If you are selling a property you let out, the relief you can get depends on the financial gain you make from selling your property and the amount of time you lived there.

    You’ll get private residents’ relief for the number of years you lived in the home and for the last nine months you owned the home, even if you weren’t living there at the time.

    For example, you buy a house in 2002 for £100,000, which is your main and only home, ten years later, you buy another house, which you move into and rent out the first property. After another five years, you decide to sell your first property for £200,000, making a taxable gain of £100,000. You can get private residence relief for the ten years you originally lived at the property (which comes to 33.33%) and pay the capital gains tax on the five years you let the property out.

    What is Lettings relief?

    If you rent out a room in the property while you live there or if you once lived there, you may be entitled to lettings relief. Lettings relief is available if you are selling a house that is, or has been, your main residence.

    For example, if you let out 10% of your house to a tenant and you occupied the other 90% as your home. When you sell your home, you make a gain of £40,000. As 10% of your home was rented by your tenant, you can only get private lettings relief for £36,000 (90% of the total gain). 

    This means you are entitled to a letting’s relief on the remaining £4,000 from the capital tax gain. Therefore, you may not have to pay any tax.

    You can get more advice on the government website regarding lettings relief and capital tax gains.

    Can you claim for Lettings Relief and Private Residence Relief?

    As of April 2020, landlords who share occupancy with tenants are entitled to lettings relief. Lettings Relief only applies if you let out part of your home while living there yourself as a main residence. You can apply for both Private Residence Relief and Letting Relief.

    However, if you sell out the home you let out, but it isn’t your main residence, then you can only apply for private residence relief if you have once resided in the property before.

    Submit a report to HMRC

    Once you have looked at whether you are eligible for private residence relief or/and lettings relief, you will need to work out and report any Capital Gains tax to HMRC by 31st January each year.

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