Sarah Bradford outlines the availability of the new-style lettings relief in relation to disposals of properties after 6 April 2020.
Lettings relief for capital gains tax (CGT) principal private residence (PPR) relief purposes is not the relief it once was.
The new-look relief, which applies in relation to disposals on or after 6 April 2020, is a shadow of its former self, offering landlords limited opportunity to benefit from the relief.
Nature of the reformed relief
Lettings relief provides relief from CGT where a residence is let out during a period of ownership and the associated relief conditions are met. Lettings relief only needs to be considered if PPR relief is available in respect of the disposal of a dwelling house or a part of it.
Thus, despite its name, lettings relief is not available to a property, such as a buy-to-let property, which has been let out throughout the period of ownership and which has never been occupied by the owner as his or her main residence.
Prior to 6 April 2020, the relief was available if the let property had at some time been the owner’s only or main residence. This could be before the property was let out, after the letting ceased or between let periods. It did not matter whether the owner occupied the property at the same time as the tenants in determining whether lettings relief was available.
This has all changed where the disposal of the property occurs on or after 6 April 2020, subject to the new rules being given Royal Assent. Now the relief is only available for periods of letting where the owner occupied the property with the tenant (e.g. where a person lets out a room or rooms in his main residence and continues to occupy the premises). However, if the owner shares occupancy with a tenant and the owner moves out, lettings relief will not be available for the period after the owner has moved out.
Lettings relief is no longer available where the property has been occupied as a main residence but the owner is not in occupation during the letting. Thus, a typical scenario where (say) a person retains their own property and lets it out after moving in with a partner no longer qualifies for lettings relief.
Amount of the new relief
For disposals on or after 6 April 2020, 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 pertaining to the let part is only chargeable to CGT to the extent that it exceeds the lesser of:
- the amount of PPR relief; and
The legislation includes provisions which ensure that where new-style 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 spouse or civil partner. This means that 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.
Lodger living as part of the family
A relaxed approach may be taken by HMRC (by virtue of Statement of Practice 14/80) where a lodger lives as a member of the family, sharing the family’s living accommodation and taking meals with them. In this situation, HMRC takes the view that no part of the accommodation has ceased to be the owner’s main residence, with the result that PPR relief is not restricted. Where this is the case, there is no need to consider lettings relief, as PPR relief will apply.
However, if the lodger does not live as a member of the family, PPR relief is not available in respect of the part of the property occupied by the lodger and lettings relief should be considered.
Final period exemption
Where a property has been an only or main residence at some point, the final period of ownership is exempt from CGT. For disposals from 6 April 2020 which no longer qualify for lettings relief because the owner is not in shared occupancy with the tenant, but the property has been the owner’s only or main residence at some point, the gain pertaining to the final period of ownership is sheltered from CGT.
On the downside, the final period covered by the exemption is reduced to nine from 18 months for disposal from 6 April 2020 (but remains at 36 months where the owner goes into care).
Example 1: Lettings relief available under the new rules
Margaret lived in her property for five years. To help pay the bills, throughout that time she let out two rooms. The let rooms comprised 20% of the property by floor area.
Margaret sold the property in May 2020, realising a gain of £100,000.
As 80% of the property is occupied by Margaret as her only or main residence, 80% of the gain is eligible for PPR relief. Consequently, PPR relief available on the disposal is 80%.
The remaining £20,000 of the gain is attributable to the letting.
Lettings relief is available in Example 1 and the gain of £20,000 is only chargeable to the extent that it exceeds the lower of:
- PPR relief of £80,000; and
As the gain attributable to the letting is less than £40,000, the full amount qualifies for lettings relief and there is no chargeable gain on the disposal.
Example 2: Lettings relief not available under the new rules
Hayley lives in her property as her main residence for five years, after which she buys a home with her partner. She retains her former home, letting it out for a further five years, before selling it in June 2020.
She realises a gain of £240,000 on the sale.
Hayley has owned the property for 120 months. For the first five years she occupied the property as her only or main residence and as a result, the gain for that period is sheltered by PPR relief.
As the property has been her only or main residence at some point, the gain pertaining to the final nine months of ownership is also exempt.
Thus, the gain attributable to 69 months of ownership is sheltered by PPR relief – this equates to £138,000 (i.e. 69/120 x £240,000).
The remaining gain of £102,000 is attributable to the letting. As the property disposal takes place on or after 6 April 2020 and Hayley has not shared occupancy of the property with the tenants, lettings relief is not available.
Thus, a chargeable gain of £102,000 arises on the sale of the property. Hayley can set her annual CGT exempt amount (£12,300 for 2020/21) against the gain if not used elsewhere.
Paying the tax and reporting the gain
A further change from 6 April 2020 is the obligation to report residential property gains to HMRC within 30 days of realising the gain and making a payment on account of the tax within the same time frame.
If the gain is covered by the annual CGT exempt amount, there is no need to report it to HMRC or to pay any associated tax. HMRC is launching an online service to report the gain and pay the tax.
The majority of individuals who let out property will not qualify for lettings relief under the new rules that apply from 6 April 2020, even if they have occupied the property as their main residence at some point. New-style lettings relief is only available for periods where the owner is in shared occupancy with the tenant.
Landlords affected by the loss of letting relief who realise a chargeable gain on the sale of their let property should be aware of the need to report the gain to HMRC within 30 days of the date of disposal and to make a payment on account of the CGT due within the same window.