What is capital gains tax letting relief?


Selling a property is a costly business. You’ve got to prepare your home to be sold, then there are the estate agent’s fees, the solicitor’s fees and possibly other expenses such as removal company fees. The last thing you need on top is additional tax. This blog looks at capital gains tax letting relief which can help you mitigate your property tax when you sell a home that you have partially let out.

What is capital gains tax (CGT)?

Capital gains tax, or CGT, is a tax that is applied when you sell an asset that has appreciated in value over time. The most common asset that people own which attracts capital gains tax is a property. Capital gains tax is applied to the difference between the purchase price including any costs to purchase and the sales price including any costs of selling.

There is an annual capital gains tax allowance for individuals, currently £12,300 in 2022/23 (soon to be reduced to £6,000) which can be offset against the gain but there are some other reliefs available too.

What is private residence relief?

Private residence relief is calculated according to how long you have lived in the property being sold. If you have had the property as your only or main home for the entire time you owned it, then you will attract 100% private residence relief on any capital gain that you make. That means for most people who only have one property that they only they and their family members live in, there is no tax to pay on selling.

What is capital gains tax letting relief?

Capital gains tax letting relief is a relief available to individuals who have partly let their home during ownership. Let’s take a look at any example to see how it works.

Mrs Jones purchased a two-bedroom flat in 2014 for £79,000. She incurred £3,000 of additional fees including stamp duty and legal costs. In 2020 she sold the flat for £156,000, incurring £2,000 of estate agents and legal fees. During her 6 years of ownership, she let out the second bedroom. The bedroom amounts to 20% of the property.

The chargeable gain is:

Sale price                          £156,000

Less costs of sale             £   (2,000)

Less purchase price         £   (79,000)

Less costs of purchase    £   (3,000)

Total chargeable gain    £   72,000

As 20% of Mrs Jones’ property was let out, she gets private residence relief of £57,600 (80% of the gain), leaving a chargeable gain of £14,400.

However, capital gains letting relief is available to mitigate this because she shared the property with her tenant..

Mrs Jones can claim the lowest of the following:

  • the same amount you got in Private Residence Relief
  • £40,000
  • the same amount as the chargeable gain you made while letting out part of your home

So, letting relief of £14,400 can be claimed, bringing the chargeable gain to zero.

If the chargeable gain had been above £200,000, some capital gains tax would have been payable as the letting relief would only be £40,000 against a gain after private residence relief of £44,000.

The impact of capital gains letting relief on taxation

For homeowners who are part-letting their property, many will pay no capital gains tax on the sale of their property.

It’s important to also note that a couple who are joint owners can each claim lettings relief leading to a substantial gain on sale which would not be subject to tax.

N.B. Prior to April 2020, capital gains tax lettings relief was available to homeowners who let their property but didn’t share with their tenant. Now, you can only claim this relief if you live in the property at the same time as your tenant.

Make sure your CGT is correct

Any tax bills arising from capital gains tax due on the sale of property must be paid within 60 days of the sale date. This means you can no longer add this to your annual self-assessment unless the sale occurred between 4th February and 5th April in each tax year. You will need to complete a separate declaration of capital gains tax known as an SA108 form or report and pay your CGT online. If you need help working out your chargeable gain, please contact the team at Adams Accountancy on 01322 250001. We’ll make sure you pay the correct amount on time so you avoid any expensive fines.

You may also be interested in:

How to pay national insurance when self-employed

Your guide to capital gains tax