Help with CGT calculation

I note you haven't explicitly answered this question. Yes or No?

Is it? The phrase "gain arising due to letting" is a simplification of "gain which would otherwise become chargeable as a result of letting".

I'm sure I've seen the same concept expressed in different (and less ambiguous) words elsewhere in IR's bumf (can't remember where). It described LR as available to the extent that PRR is restricted as a result of the letting.

In my example the 30k gain attributed to the 3 letting years would not have become chargeable, because the period in which letting occurred was already covered by PRR. It does not matter what use the property is put to in the last 3 years, PRR is due in respect of them, and so if you let during the final 3 years, PRR is not restricted as a result of letting, or in other words, there is no gain which would have become chargeable as a result of the letting.

I read that as saying that in my example the middle 3 years (of use as second home) are the sole cause of the restriction of PRR from the full

90k down to 60k, and you cannot use LR to bring relief back up to 90k, because the gain is not due to letting but due to use as a second home.

So example 5 is wrong.

Doug?

Mr Ramage?

If the only period(s) of letting, occur in the final 36 months of ownership, there can be no LR.

Ronald, if that is what you are getting at, then I would agree with you.

Yes, that's what I'm getting at, but I'm going slightly further, and saying that if *any* periods of letting occur in the last 36 months, no LR can be allowed in respect of them. So, if I might amend my example from 3 years main home, 3 years second home, 3 years letting, to 3 years main home, 2 years second home, 2 years letting, and 2 years unused (same total period of ownership of 9 years), then there would be

6 years' PRR plus one year's LR. Specifically, with a gain of £90k, PRR would be £60k and LR would be the lower of £60k, £10k, and £40k, not the lower of £60k, £20k, and £40k. Otherwise the second letting year would be earning double relief, and would in effect give relief to one of the second-home years.

Hence, in IR87's example 5 to which Troy referred, LR should be available to Mary Jones (who owned the house for 10 years with 2 years' use as main home and then 8 years' use for letting), as follows:

PRR for 5 years and LR for 5 years (not 8), so with the stated gain of £140k, PRR is £70k, and LR should be the lower of:

£70k (PRR limit), £70k (letting related), and £40k (ceiling)

instead of the lower of

£70k (PRR limit), £112k (letting related), and £40k (ceiling)

I have had a look at Example 5 in IR87.

The Revenue have not restricted LR for the 36 month "double counting" - although it does not effect their answer as both 70,000 and 112,000 is greater than 40,000.

A quick re-reading of the relevant legislation ( which is somewhat convoluted) - namely Section 223 TCGA 1992 - still leads me to the conclusion that it should be 5/10, not 8/10.

However, if I had to submit such a CGT computation to the IR, I would be tempted to follow the IR87 formula (after consulting with my client). If the tax liability could be significantly different, then I would normally advise seeking Counsel's opinion - as I have done in the past.

Anybody else have any comments?

Yes, we're agreed, then. Subsection (4) seems pretty clear on this:

--quote (4) Where a gain to which section 222 applies accrues to any individual and the dwelling-house in question or any part of it is or has at any time in his period of ownership been wholly or partly let by him as residential accommodation, the part of the gain, if any, which (apart from this subsection) would be a chargeable gain by reason of the letting, shall be such a gain only to the extent, if any, to which it exceeds whichever is the lesser of--

(a) the part of the gain which is not a chargeable gain by virtue of the provisions of subsection (1) to (3) above or those provisions as applied by section 225; and

(b) £40,000.

--unquote

as indeed does IR87:

--quote If you let part or all of your home as residential accommodation, relief is available on the gain which would otherwise become chargeable as a result of the letting, up to the lower of

• the private residence relief due to you, or

• the gain arising due to the letting, or

• £40,000

--unquote

The operative words being "which would otherwise become chargeable".

In other words you don't get Lettings Relief on the *whole* gain by reference to the fraction of time the property has been let, but rather you first look at that part of the gain which is chargeable because PRR does not apply to it, and then you look at the reason why that part would be chargeable (broadly this might be because the property is used at that time (a) not at all, (b) as a second home, (c) as a residential let, (d) let as a holiday home, (e) some other business purpose. Only part (c) would be eligibile for lettings relief, but any period of letting which would not be chargeable anyway (because it is covered by 36-month rule PRR) cannot qualify for this relief.

What? Chance it, you mean? For shame! :-)

Unfortunately, the IR's CGT Manual does not give an identical example as Example 5 in IR 87.

In the Manual, there is a 4 year gap after the letting ceases and the sale takes place.