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bigduckontax, Accountant
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Hi, My wife & I purchased a house in 2004 for £208,000. We

Customer Question

Hi,
My wife & I purchased a house in 2004 for £208,000. We lived in it for 4 full years until 2008. At that point we purchased another property and have lived in the new property since. We have Rented out the original property since we moved in 2008.
The rented property has recently been valued at £240,000 and we are thinking of selling it when the current Tenancy Agreement ends in April 2015.
I have calculated the CGT, assuming we sell in April 2015, as:
Purchase Price £208,000
Sale price £240,000
Gain £32,000
Year Purchased 2004
Year Rented Out 2008
Year Sold 2015
Lived in property 4 years
Add (18 months) of ownership 5.5
Total years owned 11
Number of years Let 7
Private Residence Relief £16,000
Which leaves £16,000
Lettings relief £16,000
Which leaves £0
CGT exempt amount of £10,600. (£10,600)
18% Tax (£1,908) ie. No tax to pay.
Someone then mentioned to me that if I get Planning Permission to turn the rented property into four Flats then the property may be worth £300,000. I would not do any of the work, just sell the house with Planning Permission. I calculated CGT as:
Purchase Price £208,000
Sale price £300,000
Gain £92,000
Year Purchased 2004
Year Rented Out 2008
Year Sold 2015
Lived in property 4 years
Add (18 months) of ownership 5.5
Total years owned 11
Number of years Let 7
Private Residence Relief £46,000
Which leaves £46,000
Lettings relief £40,000
Which leaves £6,000
CGT exempt amount of £10,600. (£4,600)
18% Tax (£828). Ie. No Tax.
QUESTION 1: Are my calculations correct?
QUESTION 2: When we moved in 2008 we did not tell HMRC that our Primary Residence had changed. Since 2008 we have paid no bills at the rented property, we have Tenancy Agreements covering the entire period, and all our correspondence (tax, bills etc) have been addressed to the new property. Is there any likelihood HMRC will claim our original, rented, property remained our primary residence from 2008?
QUESTION 3: If I converted the Rented property into four self-contained Flats myself and rented then out, then in 5 years sold two of them, how much CGT would I have to pay? For the sake of argument we can assume the following:
Value of property when we purchased it: £208,000
Value of property now: £240,000
Cost on conversion to four Flats: £60,000
Value of each flat after completion: £100,000
Value of each Flat in five years’ time: £125,000
Hope that is not all too confusing (:
Many thanks, Paul.
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello Paul, I'm Keith and happy to help you with your question.
I concur with your calculations as per question 1.
If you did not elect to change your sole or main domestic residence within two years of acquisition of the second HMRC will base their definition on the facts presented. I suspect that they will accept that the new property will now be your sole etc.
As regards ***** *****:
Purchase price of property for CGT purposes is 208K + 60K = 268K.
Sale in five year time of half is 250K - 268K/2 = 116K gain.
Occupation time is 66 months (48 plus the last 18). Total ownership time is 232 months. Thus 232 - 66 = 166/232 is the proportion of the gain for CGT purposes, about 72%. 72% of 116K = 83K gain taxable, less Lettings Relief (40K) and Annual Exemption (11) = 32K of gain to be assessed for CGT.
I do hope I have shed some light on your question.
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3132
Experience: FCCA FCMA CGMA ACIS
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Expert:  bigduckontax replied 2 years ago.
Thank you for your support.
Customer: replied 2 years ago.

Hi Keith,


Sorry, just realised I don't understand one area. On the final question you say I would get £40k Lettings Relief on the sale of the two Flats (our of 4). Is that correct? And if so, can I claim Lettings Relief again if I sell the other two flats later on?


 


Many thanks (:


 


Paul

Expert:  bigduckontax replied 2 years ago.
Lettings Relief can be used again when you sell at a later date. The latest tax avoidance measure in this area was the reduction of the 3 year period to 18 months contained in the Finance Bill, 2014.

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