Homeowners should be advised to bear in mind the potential long term consequences of possibly a short term return, writes Anna Gaston
While an Englishman’s home is his castle, it seems that for many young people in the UK homeownership is becoming much more difficult. Many are relying on gifts or inheritance from family and yet more are choosing to remain living at home well into their 30s. This may well be a very sensible policy as the HomeLet Rental Index recently published its data showing that the average rental price for a new tenancy in the UK has increased by 2.3 per cent on last year, with that figure increasing to 3.1 per cent in London.
Those who are lucky enough already to own a property may well consider letting some or part of that property or allowing some part of it to be used by lodgers. The Government is certainly keen to encourage property owners to make use of space in their homes, with policies such as the Rent a Room Scheme which – if applicable – allows a property owner to earn up to £7,500 per year, tax-free, from letting out furnished accommodation in their home.
There are, however, potential downsides to letting out some part or all of your home. It may mean that on a future sale you do not qualify for full ‘Private Residence Relief’ (PRR) from capital gains tax.
Whether you would need to pay capital gains tax on a future sale would, of course, be very fact-specific, and would depend on whether you actually made a gain when selling the property; how large this is; and precisely how much of your property and on what terms you have let it out. For example, if you let out a separate ‘granny flat’ that will be treated differently from taking in one lodger.
At the moment HMRC accepts that if you live in your home, and you let out a room to a lodger who lives ‘as a member of the family’, (i.e. you share the same facilities and take meals together etc.) then that one lodger will not affect your ability to claim private residence relief. However, it seems that if you have two or more lodgers at any given time, then you may instead be considered to be running a ‘lodging house’ and you might lose a portion of PRR.
For example, if on a sale of your home you made a gain of £100,000, and you had always lived in 70 per cent of the property as your main home (but you also let out the remaining 30 per cent of the property as residential accommodation), then you may only qualify for private residence relief in respect of 70 per cent of the gain and you might need to pay tax on the remaining 30 per cent, unless you can claim another relief, such as Lettings Relief. If you qualify for lettings relief would be the lower of:
- The amount of private residence relief available;
- £40,000; or
- The amount of the gain arising by reason of the letting.
With a new university term around the corner, and homeowners in college towns looking to maximise their income potential, they would be advised to bear in mind the potential long term consequences of possibly a short term return.
Anna Gaston is a senior associate at boutique private wealth law firm Maurice Turnor Gardner LLP.