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Relief against Capital Gain Tax for Landlords

There is a special form of relief against CGT if you sell a property that is let out in which you lived prior to letting. This is supposed to be in addition to the principal private residence relief possible.

There is a special form of relief against CGT if you sell a property that is let out in which you lived prior to letting. This is supposed to be in addition to the principal private residence relief possible.

The Inland Revenue states 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.
Case Study

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 CGT because he is able to claim partial residence relief (two years PPR and the 36-month rule).

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!

Here at Belvoir Liverpool West Derby, we always strive to keep our landlords up to date by providing the best advice and information at all times. If you would llike to discuss this article with one of our expert team please call 0151 256 0880 or alternatively email westderby@belvoir.co.uk

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