Lettings Relief is a tax relief that was historically available to UK landlords to reduce their Capital Gains Tax (CGT) liability when selling a property that had been their primary residence but was also let out to tenants. However, following changes introduced in April 2020, the availability of Lettings Relief has been significantly restricted. Here’s everything UK landlords need to know about Lettings Relief:
1. What Is Lettings Relief?
Lettings Relief was introduced to mitigate the tax burden for individuals who sell a property that was their main home at some point but was rented out to tenants for a portion of the ownership period. It worked alongside Private Residence Relief (PRR), which exempts gains on the sale of your primary residence from CGT for the period the property was used as your home.
2. How Did Lettings Relief Work Before April 2020?
Before April 2020, Lettings Relief allowed homeowners to claim up to £40,000 per individual (or £80,000 for a couple) to reduce their taxable capital gains. This was available for any property that had been both a main residence and subsequently let out.
For example:
- If you made a £100,000 gain on the sale of your property:
- You could claim Private Residence Relief for the period the property was your home.
- You could then claim Lettings Relief on the remaining gain, reducing it by up to £40,000.
3. What Changed After April 2020?
The UK government reformed Lettings Relief in April 2020 to target abuse of the system and ensure relief only applies in specific cases. Under the new rules:
- Lettings Relief is only available if the property owner shares occupancy with a tenant during the period it is let.
- This means landlords who move out and rent the property to tenants can no longer claim the relief unless they continue to live in the property with the tenants (e.g., in a shared ownership situation).
4. Who Can Claim Lettings Relief Now?
Under the current rules, you may qualify for Lettings Relief if:
- The property was your main home at some point during ownership.
- You lived in the property at the same time as your tenants for the period being claimed.
This significantly limits the number of landlords who can now benefit from the relief, as most property owners who rent out their property do so after moving out.
5. How Is Lettings Relief Calculated?
Lettings Relief is capped at the lower of:
- The amount of Private Residence Relief already claimed.
- £40,000 (or £80,000 for a couple).
- The amount of gain attributable to the letting period.
Example:
- You purchased a property for £200,000 and sold it for £300,000, resulting in a gain of £100,000.
- You lived in the property for 5 years and then rented it out for 3 years.
- Out of the £100,000 gain:
- Private Residence Relief applies to the period you lived in the property (5/8 of the gain). This exempts £62,500 from CGT.
- The remaining gain is £37,500, which may qualify for Lettings Relief if you shared the property with tenants during the letting period.
6. What Happens If Lettings Relief No Longer Applies?
If you do not qualify for Lettings Relief under the new rules, you will need to pay CGT on any gains that fall outside the scope of Private Residence Relief. This is particularly important for landlords who have let out properties as investments after moving out.
7. Are There Other Ways to Reduce CGT on Rental Properties?
If Lettings Relief is no longer available to you, consider other strategies to reduce your CGT liability:
- Private Residence Relief (PRR): You can still claim PRR for the period you lived in the property.
- Annual Exempt Amount: Each individual has a tax-free allowance for capital gains (£6,000 for 2024/25).
- Spousal Transfers: If you’re married or in a civil partnership, you can transfer ownership of the property to your partner before selling to make use of both allowances.
- Capital Losses: Offset gains with losses from other investments.
- Enhancement Costs: Deduct costs of property improvements, such as adding an extension or renovating a kitchen.
8. What Records Should Landlords Keep?
To claim any tax reliefs and reduce CGT liability, landlords should maintain detailed records, including:
- Dates of property purchase, sale, and periods of letting.
- Receipts for allowable expenses, including property improvements and legal fees.
- Evidence of periods of shared occupancy with tenants (if applicable).
9. What Is the Future of Lettings Relief?
The changes introduced in 2020 align Lettings Relief with government efforts to tighten tax reliefs for landlords. There are no current plans to reverse the changes, meaning most landlords who rent out their properties after moving out will not benefit from this relief in the future.
Conclusion
Lettings Relief has undergone significant changes, making it harder for landlords to claim. It now only applies to landlords who share their property with tenants during the letting period. For those who no longer qualify, it is essential to explore other available reliefs, keep detailed records, and seek professional advice to manage CGT liabilities effectively. Understanding the rules and planning ahead can help UK landlords navigate the tax implications of selling rental properties.
