Understanding How the Letting Exemption is Applied

We all know that when we sell our house, it is exempt from capital gains tax (CGT) if it’s been our main residence.  If we can’t claim it as such, then any gain we make on disposal will be subject to CGT. Read on to learn about the letting exemption and how it is applied – useful reading for those who are revising for any of the CII AF1, AF5, R03 or R06 exams.

This article is relevant to examinable tax year 2017/18.

There are plenty of periods of absence that can be ignored when working out how long you have lived in a property (if you have) and how long you haven’t, such as the last 18 months of ownership and periods of 4 years when you had to work somewhere else in the UK. A lot of the periods of absence need to be preceded and followed by residence. The CII manuals quote 7 periods of absence, and they often get tested in the exams.

Another exemption which few people know about, is the letting exemption and could be an important exemption for a lot of clients who have a house that they haven’t been able to sell and have decided to rent it out and move on anyway.  Couples that have got together ‘later on in life’ may have had a property each and have decided for financial reasons (or cynical ones!) to hold onto both – living in one and renting the other.  If they do ever the sell the rented property, then how is letting relief applied?

Firstly, the letting has to be for residential use, and if it passes this test, then the amount of the relief is the lowest of (a) £40,000, (b) the amount of the Private Residence Relief or (c) the amount of any chargeable gain made because of the letting. 

Let’s look at an example:

Julian makes a gain of £150,000 when he sells his home.  He has owned it for 10 years; living in it for 5 years and renting it for 5 years.

Julian will get Private Residence Relief for the 5 years he lived there and the last 18 months he owned the property, in other words 6.5 years’ worth of Private Residence Relief = 65% meaning he won’t pay tax on £97,500 of the gain.  The remaining 35% (£52,500) of the gain not covered by Private Residence Relief is his chargeable gain.

The good news is that Julian may also qualify for Letting Relief.  As mentioned above, he can get the lowest of the following:  the same amount he got in Private Residence Relief (£97,500); £40,000 or the same amount as the chargeable gain he made from letting (£52,500).

The lowest of these figures is £40,000 so he can claim this in Letting Relief, meaning he will only pay CGT on the balance of £12,500.

Over to You…

So what rate of CGT will Julian pay if he’s a basic rate taxpayer and what will he pay if he’s a higher rate taxpayer?

Grab the resources you need!

If you’re studying for your CII R03 exam, and you’re wanting to have the advantage on exam day, grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the R03 calculation workbook taster now!

Alternatively, you can download the taster for AF1, AF5 or R06 if you are revising for any of those exams.