I've ignored the holiday letting period since I have no information that tells me whether that business met the minimum letting period requirements or not and it will only complicate matters.
NO RELIEFS CLAIMED
If you sell the cottage for £155,000 in say May 2014, having paid £53,500, you will make a gain of £101,500, £50,750 for each of yourself and your wife. The first £11,000 of each of your respective gains will be tax free leaving you each with a taxable gain of £39,750.
CLAIMING MAIN RESIDENCE RELIEF
Tachnically, there is no minimum period that one has to live in a property for it to be treated as their main home. It's more about "quality" of occupation. If you claim some relief all the tax office can do is refuse your claim. If you did claim some main residence relief, the situation for each of you individually would be as follows:
If you sell the property in May 2014 for £155,000 you will make a gain of £101,500 , £50,750 for each of yourself and your wife. By that time you will have owned it for 235 months of which you will have lived it for 3, let it for 188 (from 1998) and it will have been vacant or used as a private hoilday cottage for 44.
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 £4,535 (£50,750 / 235 x 21). The remaining gain of £46,215 is split between the letting period (£38,656 for 179 months) and the vacant period (£7,559 for 35 months).
As the property will have been both your main home and let you will be entitled to letting relief which will be the lesser of:
2 the sum of the main residence gain and the gain for the last 18 months of ownership of the property which is £4,535 and
3 the letting period gain of £38,656.
Letting relief of £4,535 will reduce the remaining gain of £46,215 to £41,680 and the annual CGT exemption of £11,000 will reduce it further to leave you with a net taxable gain of £30,680.
If you exchanged contracts to sell the cottage by 5 April 2014, you would be given an extra 18 months of exempt main residence gain and increased letiing relief. The main residence relief would be £8,422, the letting relief would be £8,422 and the net taxable gain would be £22,906.
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 that you dispose of the cottage so one of the following scenarios will apply for 2014/15 if it is sold in that tax year:
1 If your income in 2014/15 including the taxable gain is £41,865 or less, then all the taxable gain will be taxed at 18%.
2 If your income in 2014/15 excluding the taxable gain is more than £41,865, then all the taxable gain will be taxed at 28%.
3 If your income in 2014/15 excluding the taxable gain is less than £41,865 but more than £41,865 when you include the taxable gain then part of it will be taxed at 18% and part at 28%.
I hope this helps but let me know if you have any further questions.