Renting out part of your home can offer a good source of additional income, but it may also have implications for your capital gains tax (CGT) when you decide to sell. Understanding the interplay between private residence relief (PRR) and letting relief is essential for homeowners who have tenants sharing their living space. This blog post will break down how PRR and letting relief can affect your tax liability, making it easier to navigate the complexities of CGT and claiming lettings relief.
What is Private Residence Relief (PRR)?
Private residence relief is a tax relief designed to exempt homeowners from capital gains tax when selling their primary residence. Typically, if your property has been your main home throughout your period of ownership, you will not incur CGT when you sell your property. However, the situation becomes more complicated when you are letting out part of your home.
When you let out part of your home, your entitlement to PRR may change. Specifically, if only a portion of your property has been let, it is crucial to understand the implications of this on your overall tax liability. You may not be eligible for the full PRR, but that doesn’t mean you’re left without options.
What is Letting Relief?
Letting relief is another form of tax relief available to homeowners who rent out part of their property while still living in it. This relief allows you to reduce the taxable gains on the portion of the property that has been let out.
The maximum letting relief you can claim is the lower of the following three amounts:
- £40,000: This is the fixed amount available for letting relief.
- The amount of PRR due on the chargeable gain made on the part of the property let out.
- The gain on the part of the property that has been let.
Letting relief aims to assist homeowners in reducing their tax burden, especially when they maintain a primary residence in conjunction with renting out space.
How Letting Out Part of Your Home Affects Your Tax Liability
To illustrate how letting out part of your home impacts your tax liability, consider the following example. Suppose you own a property and decide to rent out a spare bedroom to a tenant. If this bedroom comprises 10% of your home, and you sell your property making a gain of £75,000, it’s vital to evaluate how PRR and letting relief apply.
Example Breakdown:
- Total Gain: £75,000
- Gain Eligible for PRR: Since you live in your home, 90% of the property qualifies for PRR, amounting to £67,500.
- Gain on Let Portion: The remaining gain of £7,500 is specific to the portion of the property that has been let out.
Now, calculating the letting relief:
- You can claim the maximum letting relief, which could be £7,500 in this case since:
- It is less than the £40,000 maximum.
- It is also lower than the £67,500 PRR amount due.
Thus, your overall taxable gain becomes:
- Total Gain £75,000 – PRR (£67,500) – Letting Relief (£7,500) = £0 CGT Liability.
In this scenario, you would not owe any CGT, as your total gain is fully offset by the reliefs available.
Important Considerations
It’s essential to note that if you have a lodger who shares common living space with you or if family members, such as children or parents, rent from you while contributing to household expenses, you will not be classified as letting out part of your home for tax purposes. This factor can help you maintain your eligibility for full PRR.
Renting out part of your home can bring financial benefits, but it is crucial to understand the nuances of capital gains tax implications. By familiarising yourself with private residence relief and letting relief, you can better manage your tax liability when you sell.
Awareness of how these elements interact not only helps you maximise potential tax reliefs but also safeguards your financial future. If you are considering renting out part of your property, ensuring you have the full understanding of letting out part of your home – claiming lettings relief can ultimately save you significant amounts in taxes when it comes time to sell. Working with resources like Simply Accounts Accountant Chester, Accountant Accrington, Accountant Nelson, Accountant Ashton or Accountant Clitheroe can help ensure informed business decisions. Get in touch with us today for more help or advice.