Welcome to our ‘5-minute read’ where we look at Private Residence Relief and Lettings Relief.
In the Autumn 2018 budget the Chancellor announced that from April 2020 changes would be made to Principal Private Residence Relief (otherwise known as “PPR”) and Lettings Relief (“LR”), which has had a major impact on the taxable gains arising when a property is sold that is, or has at some stage, been your main residence.
Private Residence Relief:
Briefly, PPR is a tax relief that reduces, or often (subject to conditions*) extinguishes any taxable gain that arises when you sell your main residence. The amount of PPR available is determined by reference to the amount of time the property qualifies as your main residence. Providing the property has been your main residence at some point, tax legislation provides that the final 9 months of ownership (previously 18 months up to April 2020) will always qualify for the relief, this is regardless as to how the property is actually used during that period. For disabled people or those in care homes, this final period exemption is extended to 36 months.
By way of an example, let’s compare the reliefs available if a house was sold pre and post April 2020.
Example: Private Residence Relief
Alex acquired a property on 1 May 2010 and lived in the property until 30 April 2018 when he moves into his new home. Alex’s original property is left vacant until it is eventually sold.
Assuming that the profit on the sale before any reliefs become payable was £100,000, then the differing positions if the sale took place in March 2020 (under the old rules) and in May 2020 (under the new rules) are as follows:
The above example is for illustration purposes only.
As you can see by delaying the sale until after April 2020, Alex’s chargeable gain increased by £8,298 (the difference between £12,500 and £4,202). If we ignore the capital gains annual exemption and assume that Alex is a higher rate taxpayer, he will have an additional capital gains tax liability of £2,323 (being £8,298 x 28%).
LR is a tax relief available to reduce any taxable gains arising on the sale of the property, which has at some stage been your main residence, but has also had periods where it has been let out.
With effect from 6 April 2020, LR is only available to property owners who have shared occupancy of the home with their tenant. As a result, in the majority of cases this relief will no longer be available, potentially giving rise to a substantial capital gains tax liability.
Example: Lettings Relief
In this case, Alex again buys the property on 1 May 2010 but instead he lives there until 30 April 2015 when he moved out of the property and in with his partner. Alex’s property was then let until it was sold. Assuming that the gain before any reliefs was £100,000 the position if the sale took place in March 2020 and in May 2020 is as follows:
Again, the above example is for illustration purposes only.
As you can see by delaying the sale until after April 2020, Alex has gone from having no chargeable gain to having a chargeable gain of £42,500. If we ignore the capital gains annual exemption and assume that Alex is a higher rate taxpayer, he will have a capital gains tax liability of £11,900.
If you would like to discuss these issues further, please contact a member of the tax team below.
* PPR eligibility criteria:
- the dwelling house has been your only or main residence throughout your period of ownership
- you haven’t been absent, other than for an allowed period of absence or because you’ve been living in job-related accommodation, during your period of ownership
- the garden or grounds including the buildings on them aren’t greater than the permitted area
- no part of your home has been used exclusively for business purposes during your period of ownership.
Written 29 October 2019 (Updated June 2023)