Letting Out Your Home? How PRR Works with Lettings Relief Explained

If you let out part or all of your home, understanding how Private Residence Relief (PRR) works alongside Lettings Relief is key to managing your tax when you sell. PRR reduces the Capital Gains Tax (CGT) you pay by covering the time you lived in the property, while Lettings Relief can lower your tax bill on the part let out. Knowing how these two reliefs interact helps you plan and claim the right amount.

You won’t get full PRR if you rent out part of your home, but Lettings Relief can help reduce the CGT on the amount of time the property was let. The rules can be complex, especially if you rented only part of the home or moved out before selling. Understanding these details ensures you don’t pay more tax than necessary.

This article will explain how PRR and Lettings Relief work together, what counts as your main residence, and how you can claim these reliefs to reduce your CGT bill. If you want to make sure you get the correct tax relief when letting your property, keep reading. For more details on this topic, see the GOV.UK guide on selling a home and letting part of it.

Understanding Private Residence Relief (PRR)

Private Residence Relief (PRR) helps reduce the Capital Gains Tax (CGT) when you sell your home. It applies to periods you owned and lived in the property as your main residence. How much relief you get depends on your ownership and occupation history, including any permitted absences.

Definition of Private Residence Relief

Private Residence Relief (PRR) is a tax relief that reduces or eliminates the CGT you might pay when selling your main home. It only covers the time you actually lived in the property as your main residence. The relief can also apply to some allowed absence periods, like working abroad or moving for health reasons.

This relief applies to the gain made from selling the home, not to rental or commercial use. You must have owned the property and made it your primary residence at some point. PRR is designed to protect homeowners from tax on the increase in value of their home during the time they lived there.

Eligibility Criteria for Homeowners

To claim PRR, you must have used the property as your main residence throughout your ownership or for part of it. The property must be your only or main home during those times. You do not qualify if the house was never your main home.

You should inform HMRC about any letting periods or other uses because these affect the relief. Modern rules allow for certain permitted absences to still count for PRR, like up to 3 years of absence for any reason or 4 years for work. However, letting the property can reduce the relief unless it was your main home at some point.

If you have let out your home, check how letting relief interacts with PRR, especially after 6 April 2020, as rules have become stricter.

Calculating PRR for Your Property

To calculate PRR, you first work out the total gain by subtracting the purchase price and allowable costs from the sale price. Then, you determine how long the property was your main residence.

Calculate the relief by multiplying the total gain by the proportion of time you lived in the home (including qualifying absence periods). There is also automatic relief for the last 9 months of ownership, even if you did not live there.

For example:

You pay CGT only on the period when the property was let or not your main home. Precise record-keeping of dates and use is important to correctly claim PRR and avoid unexpected tax bills. More detailed guidance is available on the HMRC site about Private Residence Relief.

Lettings Relief: How It Works With PRR

When you let out part or all of your home, your capital gains tax (CGT) bill can change. Both Private Residence Relief (PRR) and lettings relief can reduce the tax you owe. It’s important to know how these two reliefs work together and what limits and rules apply.

Difference Between Lettings Relief and PRR

Private Residence Relief (PRR) protects you from paying CGT on any gain made while you lived in your home as your main residence. It covers the entire time you lived there plus the last 9 months before selling.

Lettings relief is different. It applies only when you have rented out part or all of your home while you lived there. It reduces the gain chargeable to CGT from letting but only up to the lowest of:

• The amount of PRR you qualify for
• The gain made from letting the property
• A fixed maximum relief figure set by HMRC

This means lettings relief only works alongside PRR and never more than the relief you get from living in the home.

Who Qualifies for Lettings Relief

You qualify for lettings relief only if you actually lived in the property as your main home at some point. If you rent out a property you never lived in, you cannot claim lettings relief.

You must have rented part or all of your home while you lived there. The relief is available even if only a small part of your home was let, like a spare room.

If you let out some rooms but continued living in the property, both PRR and lettings relief may reduce your CGT bill. If you stopped living there before letting it out, lettings relief rules are stricter.

Maximum Letting Relief Available

Since 6 April 2020, the maximum lettings relief available is limited. HMRC set a maximum of £40,000 per owner, or £40,000 if you own the property jointly.

The relief cannot exceed the lowest amount among the gain on the letting, the PRR available, or £40,000.

For example, if your gain from letting is £30,000 and your PRR is £50,000, your lettings relief will be capped at £30,000, which is lower than the £40,000 limit.

This cap applies even if you let out only part of your home. The limit prevents large lettings relief claims and aims to focus relief on owner-occupiers.

Changes to Lettings Relief Since April 2020

Before 6 April 2020, lettings relief was more generous. You could claim up to £40,000 per owner regardless of whether you lived in the home during letting.

Since April 2020, lettings relief only applies if you lived in the property as your main residence when letting it out. This change reduces eligibility and limits claims.

HMRC introduced this restriction to stop lettings relief being claimed on homes not lived in by the owner.

If you rented out your former main home after moving out, you no longer qualify for lettings relief unless you return to live there before sale.

The change does not affect PRR, which remains available based on actual residence. For more details from HMRC, see lettings relief rules after April 2020.

Capital Gains Tax Implications When Letting Out Your Home

When you rent out all or part of your home, different rules affect how your Capital Gains Tax (CGT) is calculated. You need to understand how to work out your chargeable gain, then see how tax reliefs like Private Residence Relief (PRR) and Lettings Relief apply. You also must know how having tenants or lodgers changes your living space for these rules.

Calculating Capital Gains and Chargeable Gains

Your capital gain is the difference between the price you sell your property for and the price you originally paid, including certain costs like improvements and sales fees. This is called the gain before reliefs.

The chargeable gain is your actual taxable gain after subtracting any reliefs. You only pay CGT on this amount.

When you rent out part or all of your home, the time it was your main residence will usually be exempt from CGT under PRR. The part rented out may not qualify for full relief, increasing your chargeable gain. The calculation often splits the gain between private use and rental use based on time and space.

Applying PRR and Lettings Relief to Reduce CGT

Private Residence Relief (PRR) exempts the gain during the years the property was your main home. It also covers the last nine months of ownership, even if you were not living there then.

Lettings Relief can reduce CGT further but only if you lived there as your main home at some point. It applies up to £40,000 of relief per owner or the amount of PRR you get, whichever is lower.

Both reliefs work together to lower your tax bill. PRR covers most of your gain first. Lettings Relief then reduces the chargeable gain linked to the rental part. If you rented out the whole property without ever living there, Lettings Relief does not apply.

Dealing With Tenants and Lodgers

How you let your home matters for CGT. If you have tenants renting a separate part, you must calculate the rental proportion carefully. This often involves measuring the floor area used for letting.

If you have lodgers sharing your living space, different rules can apply. Sharing living space can keep the property fully qualified for PRR for the entire period you lived there, reducing your gain.

When tenants use a self-contained space, PRR and Lettings Relief may both reduce your CGT. However, if the property is mostly let, your relief could be less. Keeping good records of tenancy periods and space used is key to a correct CGT calculation.

Practical Considerations and Seeking Tax Advice

When you let out part of your home, there are specific steps you must take with HMRC. Understanding the common errors and knowing when to get expert tax advice can help you manage your tax relief accurately and avoid penalties.

HMRC Reporting Requirements

You must report any gains from selling your home if you have let it out, even if you lived there previously. HMRC requires you to declare the capital gain and claim any Private Residence Relief (PRR) or Lettings Relief you qualify for.

You need to complete a Capital Gains Tax (CGT) return within 60 days of selling the property. This applies regardless of how small the gain is. Keep detailed records of the periods you lived in the home and when it was let.

If you miss the reporting deadline, HMRC can charge penalties and interest. So, it’s important to file the correct paperwork on time to avoid complications.

Common Mistakes to Avoid

Many homeowners either underestimate or forget to report gains when letting part of their home. A common error is failing to separate the gain related to the part you let out from the part you lived in.

Another mistake is ignoring the 60-day reporting rule after selling. Missing this can trigger fines or extra tax charges. Also, some people misunderstand how much Lettings Relief they are entitled to. The maximum relief is limited to the lowest of £40,000, the gain on the let part, or the amount of PRR due.

Incorrectly calculating ownership periods or mixing records of different uses of the property can lead to paying more tax than necessary.

The Importance of Professional Tax Advice

Tax rules around letting part of your home are complex. Professional tax advice can help you correctly calculate your reliefs and ensure your reports to HMRC are accurate.

A tax expert can explain how PRR interacts with Lettings Relief based on your individual situation. They can also identify tax planning opportunities you might miss, such as adjusting ownership shares if you co-own the property.

Getting advice early, especially before selling, helps you plan and avoid costly mistakes. It also provides peace of mind that you meet all HMRC requirements and pay the right tax amount. 

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