What is Private Residence Relief?

You may be able to reduce the amount of capital gains tax you need to pay when selling a buy-to-let property.

Here, our guide to Private Residence Relief for landlords explains how the relief works and what you could do to benefit.

What is Private Residence Relief – and who’s eligible?

Private Residence Relief (PRR) is a capital gains tax relief that’s automatically applied when you sell a property.

To benefit from the full relief, it must be your main home (you may also qualify when you dispose of a residence that you’ve provided for a dependent relative).

Whereas if you’re selling a second home or buy-to-let property, you’ll have to pay capital gains tax on property profits – but you might be able to get some relief depending on whether you’ve ever lived in the property.

You don’t get any tax relief if you bought your property to make a gain – in other words, if you bought it as an investment or to use it for business.

Tax when you sell your second home

As mentioned above, when you sell a second home that’s increased in value, you’ve made a ‘gain’. HMRC sees the gain as taxable – this is capital gains tax.

There are factors that might mean you can get some relief though:

• if the property was ever your main residence
• if you let part or all of the property
• whether you used the property for business (although a spare room as an office doesn’t count here)
• the grounds cover less than 5,000 square metres

How to calculate Private Residence Relief

So as a landlord, the relief you can get depends on the financial gain you make from selling your property and the amount of time you’ve lived there.

You’ll always get full relief for:

• the years you lived in the home
• the last nine months you owned the home – even if you weren’t living there at the time

Example:

You buy your property for £190,000 and sell it six years later for £240,000 – making a taxable gain of £50,000.

You lived in the whole property for two years before letting it out. You’ll be able to get relief on the time you lived there, plus nine months after you move out.

You’ll get Private Residence relief for the 33 months (46 per cent of the time) you lived in the property. So you’ll get relief on 46 per cent of the gain, which is £23,000.

The remaining 54 per cent of the gain (£27,000) isn’t covered by Private Residence Relief, so this is your chargeable gain.

The government has a private residence relief calculator to help you work out the tax you’ll pay when you sell your home.

Private Residence Relief – 18 months or nine months?

If you sold the property between 6 April 2014 and 6 April 2020, you get relief for the last 18 months you owned it.

However since April last year, this relief is restricted to nine months after you move out.

Can you claim both Private Residence Relief and Letting Relief?

Changes in April 2020 mean that only landlords who share an occupancy with tenants can get Letting Relief.

As this only applies if you let out part of your home and are living there yourself as a main residence, you can get both Private Residence Relief and Letting Relief when you sell your home.

To calculate Letting Relief, you’ll need to work out the proportion of your home that’s let out. If eligible, you can get up to £40,000 in Letting Relief.

Example:

You rent out one bedroom to a lodger. This amounts to 10 per cent of your home.

You sell your property and make a chargeable gain of £40,000. As you let out part of your main home, you’ll get Private Residence Relief on 90 per cent of this gain (£36,000).

You’re entitled to Letting Relief on the remaining gain (£4,000). You won’t have to pay any tax.

Reporting to HMRC

Once you’ve calculated any relief you’re eligible for, you’ll need to report any capital gains tax to HMRC by 31 January each year. Our guide to capital gains tax for landlords has more information on this.

As tax is complicated, please use this as a guide only and speak to a professional about your individual circumstances.

Is there anything in this guide you’d like to know more about? Let us know in the comments below.

Useful buy-to-let guides

• What is capital gains tax? A guide for business owners and landlords
• The UK’s best buy-to-let areas
• Sharp rise in landlords using companies to buy rental properties
• London rent prices: which areas have the highest and lowest average prices?
• Do I need landlord insurance?