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Lettings relief provides additional relief for tax where a property that has been occupied as a main residence is let out. For disposals prior to 6 April 2020, relief was available where a property was let as long as that property had at some time been the owner’s only or main residence. However, availability of the relief is seriously curtailed in relation to disposals on or after 6 April 2020. From that date, relief is only available where the owner shares the property with the tenant.

Amount of the new-style relief

For disposals on or after 6 April 2020, lettings relief is only 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 relating to the let part is only chargeable to capital gains tax to the extent that it exceeds the lesser of:

  • The amount of private residence relief; and
  • £40,000.

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. Where 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.

Example

Henry brought a three-bedroom house in 2015. He lived in the property for five years until it was sold in May 2020, realising a gain of £90,000. Throughout the time that he lived in the property, he let out two rooms. The let rooms comprised one-third of the property by floor area.

Two-thirds of the property was occupied as Henry’s main residence, and thus two-thirds of the gain qualifies for private residence relief. This equates to £60,000 (2/3 x £90,000).

The remaining gain of £30,000 is attributable to letting.

As Henry occupied the property with the tenants, he can claim lettings relief. Thus, the gain attributable to the letting is only chargeable to capital gains tax if, and to the extent, that it is greater than the lower of:

  • 60,000 (the amount of the private residence relief); and
  • £40,000.

As the gain attributable to the letting is less than £40,000, lettings relief is available to shelter the full amount of the gain.

Consequently, the entire gain is free from capital gains tax.