Under the dreadful cloud of COVID-19 some major tax changes are seemingly going under the radar. One such change is lettings relief, a previously valuable tax break available to those selling their home which was rented out at some stage. This tax mitigation opportunity has now been abolished and has been replaced with a much less attractive tax break which severely restricts the circumstances in which relief is available. We explain the changes here.

Lettings relief provided additional relief for tax where a property that has been occupied as a main residence is let out. For disposals prior to 6 April 2020, a substantial tax relief was available where a property was let as long as that property had at some time been the owner’s only or main residence.

However, availability of the relief is now seriously curtailed in relation to disposals on or after 6 April 2020. Under the new rules, lettings relief will only be available where the homeowner and their tenant are in occupation of the property at the same time – shared occupation. So from 6 April 2020, relief is only available where the owner shares the property with the tenant, a move which seriously narrows any claim that could have been made under the previous rules.

Under the new rules, lettings relief will only be available where the homeowner and their tenant are in occupation of the property at the same time – shared occupation. So from 6 April 2020, relief is only available where the owner shares the property with the tenant…

The new-style (narrow) relief

For disposals on or after 6 April 2020, the new lettings relief is available where:

• part of the property is the individual’s only or main residence and
• another part of that property is let out by the individual, otherwise than in the course of a trade or a business.

The gain relating to the let part is only chargeable to capital gains tax to the extent that it exceeds the lesser of:

• the amount of private residence relief; and
• £40,000.

Spouses and civil partners can take advantage of the no gain/no loss rules to transfer the property or a share in it to each other without a loss of lettings relief. Where lettings relief would be available to a transferring spouse or civil partner for the period prior to the transfer, it remains available to the recipient.

Example

Let’s look at how this works in a real life scenario.

Idris brought a three-bedroom house in 2015. He lived in the property for five years until it was sold in May 2020, realising a gain of £90,000. Throughout the time that he lived in the property, he let out two rooms. The let rooms comprised one-third of the property by floor area.

Two-third of the property was occupied as Henry’s main residence, and thus two-thirds of the gain qualifies for private residence relief. This equates to £60,000 (2/3 x £90,000). The remaining gain of £30,000 is attributable to “letting”.

As Idris occupied the property with the tenants, he can claim lettings relief. Previously, Idris would have been able to claim the relief irrespective of whether he lived with the tenants at the same time.

Thus, in Idris’ example, the gain attributable to the letting is only chargeable to capital gains tax if, and to the extent, that it is greater than the lower of:

• 60,000 (the amount of the private residence relief); and
• £40,000.

As the gain attributable to the letting is less than £40,000, lettings relief is available to shelter the full amount of the gain. As such no capital gains tax arises.

Although in this example the entire gain is free from tax, the circumstances in which the relief can be claimed is much narrower than before and will definitely bring more people into the tax net.

In addition, the requirement for shared occupation will apply not only to future lettings but also any let periods before 6 April 2020.

Although in this example the entire gain is free from tax, the circumstances in which the relief can be claimed is much narrower than before and will definitely bring more people into the tax net.

This means that people who have let properties after they moved out will lose the relief that they would have been entitled to for those letting periods. In effect, the change is retroactive and, as such, will have a massive impact on unwary homeowners.

This change to how selling your home is taxed is harsh, both because of the retroactive impact and because of the sudden impact of the change. There are no transitional measures are in place and, considering letting relief has been around for 40 years, this has been criticised by tax advisory sector.

If you need tax advice in selling your home please call us on 0114 272 4984 or email info@shipleystax.com.