If you have let a property which was once your main home, or was treated as your main home as you lived in job related accommodation, letting relief can help reduce the tax you pay on the eventual sale. This tax relief cannot apply to a buy-to-let property that has never been occupied by the owner.
The property must be let as residential accommodation, not as office space, or operated as a trade such as bed and breakfast. If only part of the property is let, that let part must not form a self-contained annexe such as a granny flat.
The tax relief for letting is given in addition to exemption from tax for gains arising in respect of any periods when you occupied the property as your main home. This exemption is also extended to cover the gain arising in respect of the last 36 months of ownership.
The letting tax relief is the lower of three amounts:
- The part of the gain exempt because it was used as your main home;
- the gain attributed to the let period; and
- £40,000 per owner.
Julie owned a property for 13 years, but lived in it for only the first 18 months as her main home. After that it was let for ten years and remained empty before sale. The gain is £130,000 or £10,000 per year of ownership. The taxable gain is calculated as follows:
Capital gain before tax relief: £130,000
Exemption for main home for 18 months, plus last 3 years of ownership: £45,000
Relief for letting is £40,000 as is the lower of:
- £45,000 for period of residence or deemed residence
- 10 x £10,000 actual let period
- and £40,000 maximum lettings exemption
Net gain chargeable: £130,000 - £45,000 - £40,000 = £45,000