Private Residence Relief and Letting Relief – Reduce and Calculate Capital Gains Tax
Every government has a rule set for Letting out Reliefs and Private Residence Reliefs . In the UK too there are certain taxes and reliefs settled for its residents. It is recommended that you understand the tax and reliefs rules and regulations of private residence so that you don’t end up paying more or violating government’s tax rules.
1. Relief for Private Residence
There is no CGT (Capital Gains Tax) to be paid when you sell or dispose of your house if following applies:
- The total area of the grounds, that will include all buildings, are less than 5,000 sqmt (a little over an acre)
- You didn’t buy your home for investment or profit making
- You own only one home and you have lived in that home as your main home till the time you owned it.
- You never allowed any of its parts let out – and single lodgers are not included in this
- Your home or any of its parts was never used for any form of business
For this you are not required to do anything. By the rules, the owner will get tax relief called Private Residence Relief, automatically. If the aforementioned criteria does not match then the owner might have to pay the Capital Gain Tax. Civil partners and married couples can have only one property at any one time as their main home or property. If you sell a property that is not your home, the rules will differ.
2. Evaluate your gain
If you are not entitled for full Private Residence Relief then you might have to pay tax when you sell your home. You will have to evaluate your gains from selling your home, if you are liable to pay tax on it. The gain is difference between what was paid for the home while purchasing and was earned while selling it. Use the market value as an alternative if,
- The house you sold was a gift (the rules varies on whether it was to your charity, a gift to your spouse or your civil partner)
- The house was sold for less than it’s value help the buyer
- It was an inherited property (and you are unaware of the Inheritance Tax value )
- The house was owned by you before April 1982
If one is not resident in the UK for tax then he/she has to liable go pay tax on gains earned since April 5, 2015.
Deducting costs from your gain
House owner has rights to deduct costs of buying, selling or making improvements in their property from the profits they received after selling it, which includes:
- Fess for estate agents and solicitors
- Costs of maintenance and improvement or extension works (normal maintenance costs like decorating not counted). Interest on a loan to buy your property costs can’t be deducted from the gains. If you have any doubts in deduction rules on certain costs, you can always visit HM Revenue and Customs (HMRC) for clarifications.
If you sell a lease or you home is forcibly purchased then there are special rules for calculating your profits.
Calculate if you need to pay
Whether you have to pay or report Capital Gain Tax (CGT) or not, you can find out only if you know your gain and how much tax relief you are entitled to. You can use the CGT calculator to work out how much tax you are liable to pay on your home. You can not use CGT calculator if:
- Other chargeable assets in the tax year are sold by you, such as shares
- Your share of property that you still jointly own is reduced
- You claim any deduction or reliefs except Private Residence Relief or Letting Relief
- You are a trustee, company, agent or personal representative
3. What if you are living away from your home?
If one is living away from own home then it is likely that he/she will get Private Residence Relief. However, relief is available for certain periods. If you are not UK resident for tax then rules may vary.
When do you always qualify for relief?
Whether you have one or multiple homes or lived in it or not, you are always entitled for last 18 months relief before you sold your house. It should have been your only or main place of stay or residence at some point of time in your life while you owned it.
You are entitled for first 12 months relief from the home you owned, if both the following apply:
- Your home was built and renovated or you couldn’t find a buyer for your old home
- At the end of the 12 months, you lived in it as your only or main residence
You will be entitled for relief for these periods, even if you have mentioned a different home as you main home or place of stay.
If you own just one home or you nominated your home
Following reasons make you entitled for relief if you were away from your own home:
- For a period of total 3 years for any reason it be
- If you have to live away from your home in UK for work and this is for up to 4 years
- any period if you were working outside the UK
It is necessary that you have lived in your home before and afterwards, unless you were prevented by your work.
If you have just one house you are entitled for last 36 months relief before you sold your home if one of the following apply:
- Your disability
- You are in long-term home or residential care
- You sold your home/property before 6 April 2014
If you own more than one home
Mostly, you are entitled for relief on for one home for any given period. It is suggested that you maintain records of your each property you lived in as your main home. In case of married couples or civil partnership, only one home per couple as main home for any period is entitled for relief.
If you have mentioned a property as your home, you won’t get relief from another property while your home is nominated, besides for the duration that all the time qualified for relief.
There are several other rules that can implicate your tax relief when you sell your home. Contact Capital Gain Tax helpline if you have any doubts about the rules and their purpose.
4. Nominating a home
You are entitled for relief for maximum time you live away from your property if you have nominated your property as your main home. All you need is, while you owned your home, you must have lived in that home as the only and main place of stay or residence at some point of time. If you are not UK resident for tax, the rules will vary Moreover, besides particular time period that always entitles you for relief, you won’t get assistance for another home for the time period your home is nominated.
You have to write to HM Revenue and Customs (HMRC) to nominate one property as your main home. While doing so do add the address of the home you plan to nominate. The written piece must be duly signed by all the owners of the property.
This activity of nominating a home must be done within 2 years every time your arrangement of home changes. If by any chance you forget to nominate or do not nominate and you sell your home or properties then you must maintain records of your stay in it as your main residence. This will help you avoid any tax violations or can even help you get reliefs when it is due.
From 6 April 2015, only if you have lived in a property or home for at least 90 days in the tax year, you can nominate a home/property abroad.
5. Letting out your home
You will have to pay Capital Gain Tax (CGT) if you let your home/property out. Your CGT will depend on the duration of your stay in it. However, if you have a single lodger, it won’t count as letting out.
Evaluate how much tax you have to pay
You will have to pay tax on your ‘taxable gain’ that is your profit from letting out minus any Private Residence Relief you are qualified for.
You are entitled for full relief for:
- The number of years or duration you lived in the home/property
- The last 18 months before your sold the house - even if you were not staying there during that time
However, if you are disabled and own only one home, or in home care for a long time or sold the home/property before 6 April 2014, you are qualified for full relief for the last 36 months while you owned your home that before you sold it. If you find this all process confusing then it is advisable you hire an advisor who can assist you in making the evaluations.
Claim Letting Relief
You will be qualified for the lowest of the below mentioned:
- the amount that you were given in Private Residence Relief
- the same amount as the taxable gain, you earned from letting your property/home
Relief from letting your property/home does not include any amount of the taxable gain you earn while your home is vacant.
Capital Gains Tax may be affected by other rules that may make you liable to pay. Contact Capital Gains Tax helpline, if you have any doubts about the CGT and its paying methods.
Letting out part of your home
When you let out part of your home/property, you will need to evaluate the proportion you lived in. Then you will be qualified only for Private Residence Relief on the part of your gain.
You may be qualified for Lettings Relief too.
Lettings Relief – Tips and Traps
The property or home where you have lived in as your only or main residence at some point of time and which has been let out as residential accommodation can qualify you for Letting Relief, which becomes a valuable relief for its reduced Capital Gains Tax (CGT) that is to be paid on the sale of the home/property.
You must be familiar with the way Private Residence Relief concept work. This makes sure that no Capital Gains Tax is to be paid on any profit from the property, which is believed to be the taxpayer’s one and only or main residence all through the period of ownership.
Although, if the home/property happens to be the only and main residence of the taxpayer for some of the part of the ownership, or if there has been some other use of the property other than taxpayer’s main residence the amount qualified for Private Residence Relief is reduced that is the part of the profit from the property become taxable to CGT.
However, the last 18 months of ownership are included as a period when the property/home was the one and only or main residence of the taxpayer, while evaluating the amount of Private Residence Relief for the taxpayer.
A person may choose to rent out a home/property in many situations, which was one his/her/their only or main residence for living.
For example, many a times people decide to let out their property/home while they are away travelling. On the other hand, couple may decide to live/move in together keep one of the properties/home as a buy-to-let investment. In such circumstances, lettings relief could be obtainable on sale of the property in due course.
Tip for maximum relief
To avail maximum relief from the property/home, living in it as an only and main residence for a short period can benefit as it also creates likelihood of claiming letting relief as well as it ensures exemption of the final 18 months of ownership from Capital Gains Taxes.
When used for both purposes
You are entitled for lettings relief when all or part of your home/property is let out for residential purposes while another part of the property is used as only and main residence of the taxpayer during a certain period of the ownership. As a result, to make the home or property as the only and main residence for living for the taxpayer for some point of time to bring the gain within the purview of letting relief can be beneficial from a CGT’s point of view.
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