How Letting Relief Reduces Capital Gains Tax on Residential Property

Homeowners who have lived in a property and later let out part or all of it, individuals selling a former home that has been rented, married couples and joint owners, and property owners unsure whether historic letting relief still applies. Clarifying when Letting Relief applies alongside Private Residence Relief (PRR), and whether you still qualify under the post-6 April 2020 rules. Many property owners still assume the historic £40,000 Letting Relief automatically applies. Since 6 April 2020, this is no longer the case for most landlords. Incorrect assumptions can materially increase your Capital Gains Tax (CGT) exposure on sale.

When Letting Affects Private Residence Relief

Homeowners that lived in their home at the same time as tenants, may qualify for letting relief on gains they make when they sell the property. Letting relief does not cover any proportion of the chargeable gain made while the home is empty. The maximum amount of letting relief due is the lower of:

• The amount of private residence relief due
• £40,000
• The amount of gain you’ve made on the let part of the property

Worked example:

• You used 40% of your house as your home and let out the other 60%.
• You sell the property, making a gain of £60,000.
• You’re entitled to private residence relief of £24,000 on the part used as your home (40% of the £60,000 gain).
• The remaining gain on the part of your home that’s been let is £36,000.

The maximum letting relief due is £24,000 as this is the lower of:

• £24,000 (the private residence relief due)
• £40,000
• £36,000 (the gain on the part of the property that’s been let)

The letting exemption is only available when the conditions outlined above apply, most importantly that the property owner(s) were / are in shared occupancy with a tenant. The letting relief was more generous prior to 6 April 2020, when the requirement for the property owner to live in the property at the same time as their tenants did not apply.

When Letting Relief May Apply

Letting Relief is designed to reduce CGT where a property was:

• Previously your only or main residence, and
• Later let as residential accommodation.

Conditions for Qualification

• The property must qualify for Private Residence Relief for part of the ownership period.
• From 6 April 2020, you must be in shared occupation with the tenant for Letting Relief to apply.
• The relief is limited to the lower of:
  • The amount of PRR already calculated,
  • £40,000, or
  • The gain attributable to the letting period.

Important: If you move out and rent the entire property without shared occupation, Letting Relief will generally not apply for disposals after 6 April 2020.

How Letting Relief Is Calculated

The calculation follows these broad steps:

1. Calculate the total capital gain.
2. Deduct the portion covered by Private Residence Relief.
3. Assess whether Letting Relief applies based on shared occupation.
4. Apply the lowest of the statutory caps.

Worked Example

• A property was owned for 10 years.
• It was occupied as a main residence for 6 years.
• It was let for 4 years.
• PRR applies to the 6 years of occupation plus the final 9 months (where applicable).
• Letting Relief may apply only if shared occupation occurred during the letting period.

The final CGT liability depends on ownership history, occupation pattern, and timing of disposal.

Post-6 April 2020 Rule Changes

For disposals on or after 6 April 2020:

• Letting Relief is only available where the owner and tenant were in shared occupation.
• The broad £40,000 exemption that previously applied to many landlords is no longer widely available.
• Most individuals who move out and fully let a former home will not qualify.

This change significantly narrowed eligibility and has increased CGT exposure for many former homeowners.

Real-World Scenarios

Former Home Now Fully Rented

• You lived in the property.
• You moved out.
• You rented the entire property to tenants.
• Post-6 April 2020, Letting Relief will generally not apply unless shared occupation occurred.

Partial Occupation With Lodger

• You remained living in the property.
• You let out a room.
• Shared occupation may preserve eligibility for Letting Relief.

Joint Ownership

• The £40,000 cap applies per qualifying owner.
• Each owner must independently satisfy the conditions.

Risks of Incorrect Assumptions

• Overestimating available Letting Relief
• Assuming the historic £40,000 exemption still applies automatically
• Underpaying Capital Gains Tax
• Submitting an incorrect 60-day CGT return
• Potential amended returns and interest exposure

Letting Relief is now a highly restricted relief. Eligibility must be reviewed carefully before disposal.

Before You Sell

Before exchanging contracts on a property that has been let:

• Confirm whether Private Residence Relief applies.
• Assess whether shared occupation occurred.
• Calculate the proportion of gain exposed to CGT.
• Review reporting obligations within 60 days of completion.

Proactive review ensures that relief is correctly applied and CGT exposure is properly understood.