Thanks for your question
Yes your wife will be liable to capital gains as this is a property that ceased to be her main residence over three years ago. Assuming the property is sold in 2013 then the gain will be calculated as follows (although these are general details)
Property owned for 336 months and was main residence for 36 months
So private residence relief (the exempt element of the gain due to this being the main residence) will be 36 months plus the last 36 months of ownership
So the gain will be (sale price less purchase price, which forms the initial gain, from which the acquisition and selling costs and capital improvement costs can be deducted) x 264/336
Then the first £10,600 of the gain is exempt as this will be your wifes capital gain exemption allowance for the year of sale, with the remaining gain liable to capital gains tax. This does not take into account private lettings relief, which may be due if your mother in law paid market rent to your wife (and this was declared to HMRC)
Capital gains will be either 18% or 28% or a mix of both, and the rate at which the gain is charged at, is dependent on what unused basic rate is available from the annual income position.
So for example, an annual income of £30,000 sees £12,475 unused basic rate band (as its £42,475) so the first £12,475 of the gain would be liable to 18% and any remaining gain liable to 28%
Your wife should alert HMRC to the sale of this property - so they can arrange a capital gain declaration after the following 5th April. And any tax due is then paid the following 31st Jan
So if the property is sold before 05/04/2014, then the 2014 self assessment tax return with the capital gain declaration is made after 05/04/2014, and any tax due is paid no later than 31/01/2015.
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