Find out more about how you can cut your capital gains tax bill through taking advantage of private residence relief and lettings relief.
What is it?
In a nutshell private residence relief is tax relief when you sell your main home. Any gain that you have made when you have sold the property is not subject to capital gains tax. However, this is treated differently if it has not been your main residence throughout.
Does it affect you?
If it is not your main home then the last 18 months before it has been sold is treated as your main residence, hence no capital gains tax even if it wasn’t occupied.
If your property is bought for the purpose of letting out and never for private residence, then the gain made after disposal is wholly chargeable to capital gains tax. This is calculated by utilising your annual exemption. The gain will be taxable at 18% when income falls in the basic rate band and 28% thereafter.
How does it work?
Sarah bought a buy to let property on 1 April 2010 and sold it on 31 March 2018. Sarah realised a chargeable gain of £55,000.
Because Sarah had never occupied the home as her main residence, private residence relief is not available, and the gain is charged in full.
Sarah is a higher rate tax payer and has not utilised her capital gains tax exemption.
The chargeable gain after deducting her annual exemption (11,300 for 2017/18) is £43,700.
This is then taxed at 28%, her capital gains tax bill is £12,236 (£43,700 @ 28%).
Are you eligible?
You are eligible to lettings relief when a gain has been made on the sale of a property when:
• At some time, it has been your only or main residence
• While you have owned the property, it has been let as residential accommodation
• A chargeable gain arises as a result of the letting
The amount of relief you are allowed is the lowest of the following three amounts:
1. The amount of private residence relief
3. The amount of chargeable gain arising as a result of the letting
If Sarah lived in the property as her main residence for the first year she owned it, letting it out from 1 April 2011.
This means she is entitled to private residence relief for the first 12 months she occupied it and the final 18 months – totalling 30 months.
The gain on the property was £55,000.
Sarah owned the property for 8 years (96 months)
Private residence relief is available for 30/96ths of the gain, i.e £17,188 (£55,000 x 30/96).
The amount of the chargeable gain arising as a result of the letting is £37,812 (£55,000 – £17,188).
The amount of lettings relief is the lowest of the following:
1. £17,188 – The gain qualifying for private residence
3. £37,182 – gain attributable to letting
Sarah is therefore entitled to a lettings relief of £17,188 is available.
To further calculate Sarah’s capital gains tax, the following calculation is explained:
Gain on sale £55,000
Less: private residence relief (£17,188)
Less: lettings relief (£17,188)
Chargeable gain £20,624
Less: annual exempt amount (£11,300)
Taxable gain £9,324
Capital Gains Tax @ 28% £2,610
The availability of private residence relief and lettings relief has saved Sarah £9,626 (£12,236 – £2,610).
Overall, it is important to consider your residential status options in order to get as much CGT relief as possible.
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