Let’s kick off our discussion about what is lettings relief. It’s an important topic to explore if you’re considering selling a property that you once lived in as your main residence but later rented out. Lettings relief can be a valuable tax-saving strategy that helps reduce your capital gains tax liability. By understanding the ins and outs of lettings relief, you can potentially save a significant amount of money when it comes time to sell your property. So, let’s dive in and explore the intricacies of lettings relief together!
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What is Lettings Relief?
Lettings relief in the UKÂ is a way to reduce the capital gains tax liability when selling a property that has been let out. Essentially, the relief allows individuals to exempt a portion of the gain made from the sale of the property from capital gains tax. The relief is available for both residential and non-residential properties.
Certain conditions must be met to qualify for lettings relief, such as the property being let out as residential accommodation, the property being the individual’s main residence at some point during their ownership, and the individual not having claimed rent-a-room relief. The amount of lettings relief that can be claimed depends on various factors, including the amount of gain made from the sale of the property and the amount of private residence relief already claimed.
What are the Criteria for Eligibility for Lettings Relief?
To be eligible for lettings relief in the UK, there are a few criteria that you need to meet. First, the property must have been your main residence at some point during your ownership. Second, you must have rented out the property while it was not your main residence.
What is the Way to Calculating Lettings Relief?
To calculate letting relief in the UK, you would first need to determine the total gain made from the sale of the property. Then, you would subtract any unused private residence relief (PRR) from the gain. The remaining gain is known as the chargeable gain.
Letting relief can be claimed as the lesser of three amounts: the amount of PRR already claimed, the amount of gain made from letting the property, or £40,000. Furthermore, if the property was not the individual’s main residence for the entire period of ownership, the relief may be subject to further calculations based on the period of residence and the period of letting.
What are Common Examples?
Here are a few scenarios where letting relief may apply:
1. Moving out and renting the entire property: If you move out of your main residence and rent out the entire property, you may be eligible for letting relief when you sell it.
2. Renting out a portion of your property: In this case, the relief can help offset the gain made from the rental income.
3. Temporary absence from your main residence: If you temporarily move away from your main residence and rent it out during your absence, you may still be able to claim letting relief when you sell the property.
It’s important to note that lettings relief is subject to certain conditions and limitations. The amount of relief that can be claimed depends on various factors, including the amount of gain made from the sale of the property and the amount of private residence relief already claimed.
How do We Work out the Gain Attributable to Letting?
To work out the gain attributable to letting, you’ll calculate the period the property was let out and the period it was your main residence. To calculate the gain attributable to letting, you’ll need to divide the number of years the property was let out by the total period of ownership. Multiply this fraction by the total gain on the property to get the gain attributable to letting. This portion of the gain may be subject to capital gains tax. It’s important to keep accurate records of the periods the property was let out and used as your main residence.
How Can I Benefit From Lettings Relief?
Here’s how you can benefit from letting relief:
1. Tax savings: Letting relief can help reduce the amount of capital gains tax you owe on the gain made from the rental property. The relief can be claimed on top of the main residence relief, which already exempts a portion of the gain from tax.
2. Extended period of relief: Letting relief can be particularly beneficial if you have lived in the property as your main residence at some point and then rented it out. In such cases, relief can be claimed for the period the property was let, even if you were not living in it during that time.
3. Maximising exemptions: By utilising letting relief, you can make the most of the available tax exemptions and reduce the overall tax burden on the sale of the property. This can help you keep more of the profit in your pocket.
Remember, the specific benefits and eligibility for lettings relief may vary based on your circumstances. It’s always a good idea to consult with a tax professional or refer to the official guidelines provided by HM Revenue and Customs (HMRC) to fully understand how you can benefit from relief in your specific situation. They can provide personalised advice and help you make the most of this tax relief opportunity.
The Bottom Line
To wrap up our discussion about what is lettings relief, we’ve learned that it can be a valuable tool for reducing your capital gains tax liability when selling a property that was once your main residence and has been rented out. By claiming letting relief, you can potentially save a significant amount of money by utilising the available tax exemptions and maximising your overall tax savings.
However, it’s important to remember that the specific benefits and eligibility for lettings relief may vary based on your circumstances. It’s always a good idea to consult with a tax professional or refer to the official guidelines provided by HMRC for personalised advice and accurate information.
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