Follow up

Example of how the rule works in practice

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HMRC guidance: CG64739

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Does your client’s guest house qualify for letting relief?

Letting relief changes

Letting relief can reduce a chargeable gain by up to £40,000 for someone letting accommodation in a main residence who sells the property. This has always made it relevant for clients with guest houses. However, there were changes effective from April 2020 that initially caused some confusion.

Pro advice. Clients qualifying previously now have to pass the new shared occupancy test on any disposal from 6 April 2020. This means the shared occupancy condition must have been met throughout the period of ownership that the claim will cover, not just at the sale date. For example, they will be denied relief which might have accrued under the old rules, where, for example, the entire building was temporarily let out.

The draft legislation appeared to exclude guest houses because it required the letting to be “otherwise than in the course of a business” . However, this was later dropped, meaning the relief is still relevant to clients with guest houses.

How much?

Letting relief is the lowest of:

• the amount of private residence relief due on the part of the house which isn’t let out
• the chargeable gain attributable to residential use of the part let out; and
• £40,000.

This amount is potentially available to each individual joint owner, where a private residence is jointly owned.

Business use

Where there is business use of a property, i.e. as a guest house, letting relief can apply, but the entire guest house property must be your client’s private residence and they must continue to live in part of it, while guests occupy certain rooms within it. If an annexe exists, care will be needed to ensure it is occupied as part of the client’s main private residence.

Pro advice. A purpose-built hotel or guest house won’t qualify. The whole property must have the “character of a private residence”. There is a useful example in CG64739 (see Follow up ).

Borderline cases

The boundaries of the new rules still have to be tested in practice and through the courts. But an enduring potential danger area would appear to be where a guest house is owned jointly, say by a husband and wife, but the business is run by only one of them, possibly in partnership with someone else.

It’s not uncommon for a property to be owned by a husband and wife, with one of them running a guest house business with an adult child. The problem here is that the spouse who isn’t part of the letting business won’t qualify for the relief on a disposal.

Pro advice. You need to check any joint ownership of the property to see if the business ownership matches. If not, you should advise the client that the tax bill may be higher than they have assumed. You will then need to review the property’s past use to ensure the shared occupancy condition is met.

In order to illustrate how the rules work in practice refer to our example (see Follow up ).