To qualify for Letting Relief you must have occupied the property as your main residence yourself at some time. It doesn't matter when or for how long - even a week may be enough. However, if you have a second home, you must elect for the property to be your principal private residence within 2 years of starting to occupy it in order for this relief to be available. If you miss this deadline, you are then at the mercy of the Revenue who will decide which property is your principal private residence and when according to the facts presented. If you are in this situation, you would be well advised to either live in the property long enough for its status as your main residence to be beyond dispute or sell the other property first.

For the property to qualify as your main residence, you will need to do more than just move in for a short period. You will need to show that you intended to make it your main residence and not just a temporary stay before returning to your other property. This normally rules out holidays although you could make a holiday home your main residence if you can show that you are now using it for more than just another holiday. Some degree of permanence must be present. You can normally do this by changing your address on things like bank statements, driving licenses or pensions. You could also send your children to a local school for a while. Even a week could be enough if you are between homes.

How does Letting Relief work? It is always the smallest of the following 3 figures:

• the chargeable gain (attributable to lettings)
• the exempt gain (attributable to PPR relief)
• £40,000 per owner

Void periods should be excluded from this calculation. If a property is not let out for the whole time it is excluded from PPR relief, you must split the chargeable gain between the let period and the void period, based on the exact number of days.

The following example will illustrate this. Jack and Vera bought a house for £125,000 on 1st January 1994. The house is in Jack's sole name. On 1st January 2003 they moved out and let the house to Tyrone. On 1st January 2009 they sold the house for £650,000. Their unrelieved capital gain (ignoring buying and selling expenses) is £525,000. They are entitled to PPR relief for 12 years as it was their principal private residence for 9 years and the last 3 years are exempt. They owned the house for 15 years so only 20% is chargeable. This reduces the gain to £105,000.

Now we need to calculate letting relief. This will be the smallest of the following 3 figures:

a) The chargeable gain = £105,000
b) The exempt gain = £420,000
c) The maximum relief = £40,000

Letting relief is £40,000 so the chargeable gain is £65,000. Jack deducts his 2008/9 annual allowance of £9,600 and pays tax on £55,400. At 18% this comes to £9,972. If Jack was a  higher rate taxpayer he would owe up to £15,512 at 28%.

Assume now that Jack put half the house in Vera's name shortly after buying it. She is also entitled to the maximum relief of £40,000 so that figure now doubles to £80,000. The smallest of the 3 figures is now £80,000 and the chargeable gain falls to £25,000 between them. Jack and Vera can now use both their annual allowances so the taxable gain is only £5,800. Tax on this at 18% is £1,044 (or £1,624 at 28%). That's a total tax saving of £8,928 just for having the property in joint names.

Of course, he could have avoided capital gains tax completely, even with the house in his own name, if he had sold it 3 years after letting it. And if he had sold the house on 1st April 2007 (just 21 months earlier) there would only have been a gain of £9,528 (assuming he could have sold the house for the same price) which would have been almost entirely covered by his 2006/7 allowance even without using the taper relief and indexation available back then.

This illustrates how much tax Letting Relief can save you just by living in a house for a few years, but it also illustrates how fast capital gains can accrue once the 3 years is up after letting a house you had always lived in before. The main problem is that the £40,000 maximum relief has been frozen since 1991. Intended once to act only as a ceiling, it now restricts Letting Relief in the majority of cases. Eventually it will wither on the vine and Letting Relief will become less and less relevant, although it will probably remain a valuable relief for a long time yet.

One last point - if you let residential property and you are hoping to make use of this relief, make sure none of your tenants run a business there too otherwise you will lose some of it.