Take a look at the HMRC helpsheet HS283 for more information on the main residence and CGT. If you make a gain in excess of the annual CGT exemption when you sell the property, having never lived in it because it was tenanted, then you will have a CGT liability I'm afraid.
If you could live in it for a year or so, you may qualify for exemption for 18 months worth of the gain. However, even if you did that, the tax office may take the view that you only moved into the property to take advantage of main residence relief and letting relief to avoid tax and not to make the property your permanent home and seek to tax you on the gain. If that happened, you would have a right of appeal all the way to a tax tribunal which is an independent body. However, HMRC have won several cases in the recent past at the tribunal level.
I hope this helps but let me know if you have any further questions.
Thanks for the quick response.
It seems my anxiety was justified. How about if I lived in it for longer than a year?
The property was purchased at auction for 140,000, and just looking at prices of flats in the same road now, they are going for between 250,000 and 280,000. Such a huge rise in a short period of time was a big surprise, so naturally I'm wary that I can get a bigger property in a cheaper area. With those figures, could you give me a ballpark figure of the CGT? Rent from the tenancy is £875 a month.
The longer you can live in a property, the better but there is no set minimum. It's more about the "quality" of occupation as opposed to the period of time.
If you sold the property and made a gain of £140,000, having never lived in the property, the first £11,000 of the gain would be exempt from CGT. That would leave £129,000 taxable at 18%, 28% or a combination of the two rates depending on the level of income in the tax year of disposal of the property. If you sold the property in the current tax year, one of the following scenarios would apply:
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%.
Thanks Tony. I guess it's not worth selling it then with such a potentially massive CGT! All very frustrating as effectively my hands are tied. #3 would apply to me as I work for a charity based abroad with no pay, meaning that I would have in the region of 30,000 to pay in CGT. One last question though. How is the CGT paid? Can installments be arranged with HMRC and how is that calculated? It seems like a huge sum to pay out in full. Thanks for your help on this.
If you sold the property, ie exchanged contracts, by 5 April 2015, the CGT would be payable in full on 31 January 2016. You might be able to negotiate instalments but given the advance notice you have of the liability, a minimum of 10 months, HMRC would probably not be too keen.
If you were non-UK resident for tax puposes and sold the property by 5 April 2015 and did not return to live in the UK within five full tax years of leaving the UK if you left by 5 April 2013 or within five years of leaving the UK if you left after 5 April 2013, you would not have to pay CGT.
From 6 April 2015, non residents will be taxable in the UK on gains they make on UK residential property. However, whilst the rules have yet to be set, its likely that only the increase in value from 6 April 2015 to the date of sale will be taxed. So, in effect, the value of the property on 5 April 2015 will become its cost for CGT purposes for non-UK residents.