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TonyTax
TonyTax, Tax Consultant
Category: Tax
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I own a flat in London which I bought in 2001 for £312,500

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I own a flat in London which I bought in 2001 for £312,500 and am looking to sell it for around the recent valuation of between £1.1 - £1.2 million. I moved out of my flat in September 2011 because I got married and moved in to my Husbands property. Since September 2011 I have been renting my flat to a tenant. As I understand it, after 3 years of moving out of my flat (Sept 2011) I become liable for capital gains tax (Sept 2014). I would like to understand how much this could potentially be if I sold my property after moving out after, 3 years, 4 years, 5 years etc...
I should also mention that for 1 year while I was living there I rented out a room under the rent a room scheme.
I am ultimately trying to work out if it is worth selling it before that 3 year mark of leaving the flat hits and what my capital gains tax liability would be year after year if I held on to it for a few more years.
Thank you in advance.
Submitted: 3 years ago.
Category: Tax
Expert:  TonyTax replied 3 years ago.

Hi.

Can you tell me which month in 2001 you bought the property please.

Customer: replied 3 years ago.

Dear XXXXX,


 


Thank you for your reply. I purchased it in July 2001.


 


Kind regards


 


Sarah

Expert:  TonyTax replied 3 years ago.
Thanks.

Leave this with me while I do some calculations. These will take some time so bear with me.
Customer: replied 3 years ago.

OK thank you Tony.

Expert:  TonyTax replied 3 years ago.

Hi again.

By April 2014, you will have owned the property for 154 months. Of that, you will have lived in it for 123 and let it for 31. If you exchange contracts to sell it by 5 April 2014, all the gain will be exempt from CGT under the main residence and last 36 months rules. These figures take no account of any improvement expenditure you incurred.

However, with effect from 6 April 2014, the last 36 month exemption is being reduced to a last 18 month exemption. If you exchanged contracts to sell the property on 6 April 2014, the position would be as follows:

You will make a gain of £887,500 (£1,200,000 - £312,500). The expenses of purchase and sale (legal fees, stamp duty, survey fees, selling agent fees etc) are all deductible expenses which will reduce the gain from £887,500.

The gain for the period the property was your main home will be exempt from CGT as will the gain for the last 18 months of ownership. That will account for £812,581 (£887,500 / 154 x 141). The remaining taxable gain of £74,919 will be that part of the letting period gain which is not covered by the last 18 months of ownership (£887,500 / 154 x 13).

As the property will have been both your main home and it let you will be entitled to letting relief which will be the lesser of:

1 £40,000,

2 the sum of the main residence gain and the gain for the last 36 months of ownership of the property which is £812,581 and

3 the letting period gain of £74,919.

Letting relief of £40,000 will reduce the remaining taxable gain from £74,919 to £34,919 and the £11,000 annual CGT exemption will reduce it further to a net taxable gain of £23,919.

There are two rates of CGT, 18% and 28%. The rate or combination of rates that you will pay will be dependent on the level of your income in the tax year of disposal of the property.

If you sold the property in April 2015, having let it for another year from April 2014, the exempt gain would be £753,840 and the letting period gain would be £133,660. Letting relief of £40,000 and the annual CGT exemption of £11,000 or so would leave you with a taxable gain of £82,660.

If you sold the property in April 2016, having let it for another two years from April 2014, the exempt gain would be £703,020 and the letting period gain would be £184,480. Letting relief of £40,000 and the annual CGT exemption of £11,000 or so would leave you with a taxable gain of £133,480.

If you sold the property in April 2017, having let it for another three years from April 2014, the exempt gain would be £658,618 and the letting period gain would be £228,882. Letting relief of £40,000 and the annual CGT exemption of £11,000 or so would leave you with a taxable gain of £177,882.

Clearly, tax rules can and do change so you should be aware of that.

I hope this helps but let me know if you have any further questions.

Customer: replied 3 years ago.

Thank you very much Tony for that clear and extensive response. Just one final question; is the 'last 36 month rule' taken from the 5th of April in the year that my property is rented out or is it from the date in which it no longer became my main residence (9th Sept 2011). From your explanation it looks like it's counted from the beginning of the tax year in which I moved out rather than the actual date that I moved out!?


 


Many thanks


 


Sarah

Expert:  TonyTax replied 3 years ago.
The exemption is for the last 36 months of ownership not 36 months since you moved out. If you sell on 5 April 2014, it will be 31 months since you moved out so the whole gain will be exempt. Since you will have lived in it for 5 of the last 36 months of ownership, you get an exemption for the 5 months as part of the main residence exemption in any event.
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15847
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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Customer: replied 3 years ago.

Thank you very much Tony. Much appreciate your thoroughly explained advice. I was very happy with your service so added a small tip for your hard work. :)

Expert:  TonyTax replied 3 years ago.
Thanks for accepting my answer and for the tip.

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