If you let a property which was at any time your principle residence (even for a short period), letting relief can be claimed to help reduce the tax you pay on the eventual sale.
Letting relief is given in addition to the normal tax exemptions you get;
ie. from the periods when you have occupied the property as your main residence together with the final 36 months of ownership before sale.
Note – Letting relief cannot therefore be claimed for buy to let properties that have never been occupied by the owner. Also the property must have been let as a residential accommodation and not as commercial premises.
Letting relief is calculated as the lower of the following three amounts:
- Part of the gain exempt because it was used as your main residence.
- The gain attributed to the let period.
- Maximum of £40,000 letting relief.
A property was owned for 12 years, but lived in for only the first 18 months as the main home. After that it was let for ten years and remained empty before sale. The gain is £120,000 or £10,000 per year of ownership. The taxable gain is calculated as follows:
Capital gain before tax relief: £120,000
Exemption for main home for 18 months, plus last 3 years of ownership: £45,000
Relief for letting is the lower of the following: (ie. £40,000)
- £45,000 for period of residence
- 10 x £10,000 actual let period = £100,000
- £40,000 maximum lettings exemption
Therefore the net gain chargeable to capital gains tax is:
£120,000 – £45,000 – £40,000 = £45,000