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HMRC questions claims for Lettings Relief

Newsletter issue – February 2023

If you have claimed lettings relief to reduce the capital gains tax (CGT) payable on the disposal of a let property after 5 April 2020, you should expect to receive a letter from HMRC asking you to amend your tax return to remove that claim.

The conditions for lettings relief to apply were altered on 6 April 2020, with a retrospective effect. For disposals on or after that date, lettings relief can only apply where both the following conditions are met for residential property:

1. The property qualifies as the owner's only or main residence for CGT purposes for at least part of the ownership period; and

1. For a period of letting to qualify the landlord and tenant must occupy the property at the same time.

There is an exception to condition 2) where the owner is living in job-related accommodation, as can apply to Church Ministers, in which case those deemed periods of occupation by the owner, can qualify for lettings relief.

You can't double count a period of main residence relief and lettings relief. If the taxpayer is in concurrent occupation with the tenants, and they are living as one household, the whole property will qualify as the landlord's main residence for that period, and lettings relief doesn't come into play.

It follows that the only situation where lettings relief could apply from 6 April 2020 onwards is where part of the property is occupied separately by a tenant, for example by letting out a 'granny flat' or annex. However, if that let area has always been self-contained, it may be regarded as a separate dwelling and thus not part of the main home where the gain is covered by main residence relief.

Capital gains realized on buy-to-let or move-and-let properties that taxpayers expected to be covered by lettings relief plus main residence relief are partly exposed to CGT.