I was asked by a client last week as to what tax reliefs were available where their home (Principle Private Residence) was let under a tenancy agreement, rather than sold when they moved. This was something that we had done a number of years ago, but I needed to brush up on the current rules.
The Principle Private Residence (PPR) is the tax name for your home. There are criteria laid down by HMRC for PPR to apply https://www.gov.uk/government/publications/private-residence-relief-hs283-self-assessment-helpsheet/hs283-private-residence-relief-2017—2 , but in most cases it is the home that you own.
Generally, there is no Capital Gains Tax (CGT) to pay on the sale of your home. But if you own more than one property, the second one is liable to tax.
You can choose which property you wish to be your main residence, provided this is done within two years of buying the second property. You can then switch your nominated “main residence” between the different properties as often as you like as long as you notify HMRC each time.
To qualify for Principal Private Residence Relief, you must have lived in the property and at one point it was your main residence.
Example of PPR Relief
You purchased a property in January 2000 and sold it in December 2016, owning it for 17 years. You lived in the property for 9 years, rented it out for 8 years. It produced a gain of £150,000.
As you lived in the property for 9 years, you would be able to claim PPR relief for this period and the relief would be £79,412 (9/17 x £150,000)
In addition to the above, you are also entitled to a further 18 months of relief, and this is regardless of whether the property was let to a tenant or remained empty. Therefore, the PPR is increased to £92,647 (10½/17 x £150,000)
There are further reliefs for those who are disabled or live in care homes and the 18 months is extended to 3 years, which was the old PPR relief until 2014.
If only part of a gain on the sale of a property is covered by PPR relief, then the additional period in which the property was rented out, letting relief can be applied to reduce the remaining chargeable gain.
The maximum amount of Letting Relief due is the lower of:
The amount of Private Residence Relief due
The amount of gain you’ve made on the rented period.
Example of Letting Relief
Using the example above: You will be entitled to PPR relief of 10½ years (9 years in residence and final 18months) out of the 17 years; this part of the gain is £92,647 (refer above).
Therefore, how much Letting Relief will be allowable?
Amount of PPR – £92,647
Gain in relation to renting of the property £70,588 (8/17 x £150,000)
The lower of these is £40,000. This brings the chargeable gain down to £17,353 (£150,000-£92,647-£40,000).
An individual’s personal Capital Gain Tax allowance for 2017/18 is £11,300. So, for a husband and wife joint ownership, with no other capital gains, as the chargeable gain is covered by the allowance.
One final point to note, that if the property is empty during the letting period, then the third criteria (gain relating to renting the property) is reduced to only the rented period!
For more information on these 2 tax reliefs please contact Martin firstname.lastname@example.org
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