Does your Guest House qualify for letting relief?

Since April 2020 there have been restrictions on when letting relief on the disposal of residential property can be claimed. You are selling your Guest House and would like advice about potential letting relief. Brona MacDougall advises.

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 owners of Guest Houses. However, there were changes effective from April 2020 that initially caused some confusion.

Even if you qualified previously, you now must pass the new shared occupancy test on any disposal from 6th 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, you 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 owners of Guest Houses.

How much?
Letting relief is the lowest of:
• The amount of private residence relief due on the part of the house which is not let out
• The chargeable gain attributable to residential use of the part let out
• £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 private residence and you 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 your main private residence.

A purpose-built Hotel or Guest House will not qualify. The whole property must have the “character of a private residence”.

Borderline cases
The boundaries of the new rules still have to be tested in practice and through the courts. But a 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 is 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 is not part of the letting business won’t qualify for the relief on a disposal.

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

Despite the wording of the original draft legislation, letting relief can still apply to Guest Houses. However, you need to check that the claim is restricted to periods of shared occupancy, i.e. exclude any periods that the entire Guest House was let out, so you do need to be clear about historic use.