Private Residence Relief (PRR) and Letting Relief Restriction
Updated: May 23, 2019
From April 2020 the Government are restricting these two reliefs which could have a big effect on the capital gains you pay. Don't worry though, there are ways we can reduce this.
What is PRR and Letting relief
A sale of an asset can incur a capital gain charge on the profits made. PRR can provide full relief from capital gains on an owners main residence.
Where the owner rents his property during the period of ownership some of the capital gain on the sale is still exempt from tax, and some isn’t.
In this case, the gain on the property is calculated according to the proportion of time the owner lived in the property and the time he has not. In addition to this, the current rules allow the owner to also claim relief on the 18 months after they leave the property and chose to rent it out.
Another relief that is available is called Private Lettings Relief (PLR). This can be claimed where the owner has previously occupied the property. This can be in addition to PRR and can be worth up to £40,000. Where there is more than one owner, such as with a husband and wife, both can claim the relief separately, resulting in double relief.
Why is April 2020 important?
Come April 2020, you will only be able to claim 9 months of PRR and PLR will no longer be available, unless the Landlord shares the property with the tenant.
The following example will help explain this.
John owned a property for 10 years. He lived in it for 3 years and rented it for 7 years. The property was bought for £100k and sold for £230k.
Before April 2020
Capital gain is £130,000
The three years of ownership have full tax relief as well as an additional 18 months. Exemption for main home for 18 months, plus last 3 years of ownership will be £58,500.
Include the Letting Relief, which is the lower of:
The PRR amount (£58,500)
The gain during the period of let (£91,000)
£40,000 maximum lettings exemption
The gain will therefore be: £130,000 – £58,500 – £40,000 = £31,500
After April 2020
The three years of ownership still receive PRR relief, however the 18 months if reduced to 9 months, therefore you can only apply PRR for 3 years and 9 months as opposed to 4.5 years above. Letting Relief is also removed.
PRR: £48,750 (36 months of the ten years)
Gain: £130,000 - £48,750 = £81,250
What can we do?
Firstly, it should be noted that this will have no effect if the property is sold at a loss or sold for little profit where the chargeable gain annual exemption allowance will cover the gain. Alternatively, you could also use other capital gains losses, if available, to cover the gain on the property.
Exchange contracts before April 2020
The point of sale for the purpose of PRR and PLR is at the exchange of contracts and not the completion date. Therefore, as long as you exchange contracts before 6 April 2020 then you can claim 18 months of PRR and PLR as well.
Invest in a SEIS or EIS
By investing in companies that are part of the SEIS or EIS scheme, you will not have to pay any capital gains on any part of the gain.
Deed of Trust
If your spouse or civil partner are not on the title deeds of the property, then a Deed of Trust can help to use their Annual Exemption Allowance for capital gains. Please see our knowledge bank for our write up relating to this.
Other considerations before selling should also be considered such as:
will renovating the property before selling achieve a larger sale price
would the property need to be vacated before selling
would there be any charges for early redemption
The changes around PRR and PLR could result in large capital gain charges for landlords. Forward planning can however help you reduce the tax or completely avoid it entirely.