If you used to reside in the house but opted to rent it out later, you certainly experienced letting relief. However, many homeowners continue to believe that they can automatically claim letting relief when they sell their house. That is no longer the case because the tax relief standards were changed in April 2020, and many sellers discover that they do not qualify for the relief at all. Understanding the fundamentals of letting relief helps you make fewer mistakes while calculating capital gains tax. Here, we go over everything concerning letting relief in depth.
What Is Letting Relief?
Letting relief is a CGT relief in which the gain is reduced if the asset is sold while serving as both the primary residence property and rental housing, while the owner continues to live in the property. The relief supports Private Residence Relief (PRR). HMRC developed letting relief to safeguard property owners from paying too much CGT if they live with their renters.
How Did the Rules Change?
Before April 2020, most people were able to receive treatment despite having left the premises and let everything out. Now, the HMRC offers assistance only when:
- The property is your sole or primary residence.
- Part of the house is rented out as residential housing.
- You are living in the other sections of the property throughout the duration of renting.
As a result, even if you leave the property and totally rent it out later, you are not eligible for relief, even if you had lived there for years.
Who Can Claim Letting Relief?
You can be eligible if all of the following conditions are satisfied:
- You owned the property.
- The property was your primary or sole dwelling.
- You and your renters were joint occupants of the property.
- You are eligible for some sort of Private Residence Relief.
How Much Letting Relief Are You Allowed to Claim?
The maximum limit of letting relief is £40,000 per owner. But how much you can actually claim depends on the lower of the following three amounts:
| Limit | What it means |
|---|---|
| £40,000 | The maximum relief each qualifying owner can claim |
| Private Residence Relief available | Letting relief cannot be higher than the PRR you already get |
| Gain linked to the letting period | Letting relief cannot exceed the gain that relates to the letting |
When you share the ownership of the property, each qualifying owner can claim up to £40,000 of letting relief. Thus, the total letting relief could be up to £80,000.
Example of Letting Relief
Assume the following:
- Purchase cost: £250,000
- Sale cost: £450,000
- Capital Gain Total: £200,000
Your residence is your own, but you live in it while renting out one floor to tenants. Your calculations include the following amounts:
- Private Residence Allowance: £90,000
- Gain related to letting: £35,000
The allowance for letting calculation is the smallest of:
- £40,000
- £90,000
- £35,000
Thus, the allowance for letting calculation is £35,000.
Therefore, the taxable gain is reduced to £165,000 before any other allowances and expenses. Deducting the annual exemption allowance for 2025/26 of £3,000 from this figure, you get £162,000. In case the entire taxable gain falls into the higher CGT band and is taxed at 24%, the tax is calculated as follows:
£162,000 x 24% = £38,880
Letting Relief and Private Residence Relief
Many individuals are confused by both of these reliefs, although they function in different ways and can have a significant impact on your Capital Gains Tax payment. The Private Residence Relief (PRR) is the primary benefit. It excludes the gain received as a result of using the asset as your primary residence during that time period.
Letting relief serves as secondary relief. It has the potential to reduce the remaining taxable gain, but only if certain circumstances are fulfilled. It is now applicable if you let out a portion of your home while living in the remainder. The PRR relates to the profit from your occupation of the property, but the relief granted reduces the gains due to the time you have allowed the property. The dates you occupied the property, the date that you let the property, and if any tenants were living there can all affect your tax situation. Typically, you cannot claim this relief without being eligible for the PRR. That is why it is necessary to consider both reliefs together when working out your Capital Gains Tax.
Does Renting a Spare Room Qualify?
An individual who rents out a portion of his property while still living in it can be eligible for letting relief provided certain requirements are met. With a single lodger, the individual’s Private Residence Relief accounts for the majority of the benefit. You can also consider utilising the Rent a Room Scheme, which is separate from the letting relief.
Capital Gains Tax Rates
Any gain that remains taxable after the reliefs is taxed at 18% for profits within the basic rate band and 24% for gains that exceed it. Any sale of UK residential property that generates a CGT obligation must be disclosed to HMRC within 60 days of completion.
Common Mistakes Homeowners Make When Claiming Letting Relief
Many people tend to pay tax more than what is due as a result of:
- Thinking that all ex-residences can be covered by letting relief,
- Not considering the impact of joint occupancy on their situation,
- Not utilising private residence relief when they calculate their CGT,
- Failing to consider improvement costs,
- Missing the HMRC’s 60-day reporting period after the sale of their property, or
- Keeping an inadequate record of their acquisition cost and improvements.
Why Trust Reflex Accounting for Lettings Relief and CGT?
Calculating your Capital Gains Tax can be difficult, particularly if you have to take into account Private Residence Relief, letting relief, jointly-owned property or multiple occupation periods. Let Reflex Accounting assist you to understand the correct calculation of your tax liability and ensure you claim all of the reliefs available to you. Our core expertise includes:
- Expertise Tax planning & advice for homeowners, landlords and property investors
- Calculation of Private Residence Relief and letting relief
- Help with HMRC’s 60-day reporting requirements for property CGT
- Experience in jointly-owned property and split occupancy relief
- Advice on when to sell and property tax planning
FAQs:
Who qualifies for Lettings Relief in 2025/26?
You can claim Lettings Relief if your home was your single or main dwelling, you are entitled to Private Residence Relief (PRR), and you sublet a portion of the property while staying in another part of the property. From April 6, 2020, eligibility for Lettings Relief will be restricted if you have already sold the property before renting out the entire property.
How is Lettings Relief calculated?
HMRC calculates Lettings Relief based on the lowest of the following: £40,000, the private residence relief you are entitled to, and the gain the time during which a portion of the property was rented out while you were residing in it.
Can Lettings Relief and Private Residence Relief (PRR) be claimed together?
Yes. The tax relief on lettings cannot be claimed unless you are eligible for at least some of the Private Residence Relief. The PRR can cover the gain related to the time that the property served as your residence, and the Lettings Relief can provide further deductions.
What is the maximum Lettings Relief for joint owners?
The plan provides a maximum relief of £40,000 to each qualifying individual. When there is joint ownership of the property, and both persons qualify for the relief, they can each claim £40,000, for a total of £80,000. However, the limit is computed using the HMRC algorithm.
Can Lettings Relief be claimed after my CGT return has been filed?
Yes. There are possibilities to revise your return within the periods stipulated by HMRC if you discover that you were entitled to Lettings Relief after completing your Capital Gains Tax return. However, if the revision time limit has passed, there are alternative options to file a claim based on your circumstances.
Can Reflex Accounting help me calculate my Lettings Relief and CGT liability?
Yes, Reflex Accounting supports homeowners, landlords, and property investors in estimating the amount of Capital Gains Tax to be paid by applying Private Residence Relief and Lettings Relief, and taking permitted costs into consideration.
Does Reflex Accounting handle the 60-day CGT property return to HMRC?
Yes, Reflex Accounting offers a service for submitting the Capital Gains Tax property return form, doing the appropriate calculations for the tax due, and following the deadlines to avoid penalties or interest.
