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TonyTax
TonyTax, Tax Consultant
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We purchased a property on the 29th April 2004 which we rent

Resolved Question:

We purchased a property on the 29th April 2004 which we rent out. We paid £370k and the value today (2014) is £500k.
First, if we were to sell what is the calculation to determine capital gains tax? Second, if we sell our current property and move into the rented property as our permanent residence, how would we mitigate any future capital gains tax?
Submitted: 3 years ago.
Category: Tax
Expert:  TonyTax replied 3 years ago.

Hi.

I'm assuming the property is a straightforward buy to let property as opposed to a furnished holiday let property.

If you sell the rental property for £500,000, having paid £370,000, you will make a gain of £130,000, £65,000 each. The first £11,000 of your respective gains will be tax free assuming you have no other gains in the same tax year leaving a taxable gain for each of you of £54,000. If the property was sold in 2014/15, one of the following scenarios would apply to you:

1 If your income in 2014/15 including taxable gain is £41,865 or less, then all your taxable gains will be taxed at 18%.

2 If your income in 2014/15 excluding taxable gains is more than £41,865, then all your taxable gain will be taxed at 28%.

3 If your income in 2014/15 excluding taxable gains is less than £41,865 but more than £41,865 when you add the taxable gain, then some of your gain will be taxed at 18% and some at 28%.

You cannot always make CGT go away completely simply by moving into a property I'm afraid. If you sell your current home and move into the rental property, that will become your main home for CGT purposes by default since you will have no other. Once a property has been both occupied as a main home and let, you automatically get the last 18 months of ownership as a tax free period in addition to any earlier period of residence.

If you sold the property after 18 months of living in it and assuming you did not live in it earlier in your ownership of it, you will get 18 months out of about 142 months of ownership as a tax free gain. In addition, each part owner will be entitled to a further deduction from the gain called letting relief which would be the lesser of the following:

1 £40,000,

2 the sum of the main residence gain and the gain for the last 18 months of ownership of the property and

3 that part of the letting period gain not covered by the last 18 months of ownership.

Take a look at HS283 here for more information on the main residence and CGT.

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

Customer: replied 3 years ago.

With regard to the first question, what can we offset against the capital gains of £130k? Such as initial purchase and selling legal costs; redecorating before letting, redecorating before selling, refurbishment, house improvements, etc?

With regard to the second question, when you say the last 18 months of ownership, does this mean instead of 10 years as a rental property it becomes 8½ years?

Therefore the capital gain is £130k / 10 * 8½ = £110½k? Tax would be 28% of £110½k = £30.94k.

I do not quite understand your bullet points 2 and 3. Please would you give an example of both.

For each extra year living in the house how does that change the calculation?

Finally, if we were to move into the rental property as our main residency, would we have to get a formal valuation so that any future capital gains tax is calculated?

Expert:  TonyTax replied 3 years ago.

You can offset the costs of buying and selling the property including legal fees, stamp duty, selling agent fees, survey fees, search fees and other minor disbursements. Redecoration costs are not capital expenditure but I know some people claim them. Capital improvement costs can be offset though the tax office may ask to see proof of the expenditure in the form of receipts and invoices.

You won't get the last 18 months of ownership as a tax free period if you sell the property without it ever being your main home. The same principle applies to letting relief.

There are examples of the calculations of main residence relief and letting relief (bullet points 2 and 3) in HS283. You divide the total gain by the number of months of ownership then apportion it between the period(s) when you lived there in terms of months (2) and the period(s) it was let in terms of months (3). See pages 4, 6 and 7 of HS283.

I cannot predict what will happen to house prices in future. Clearly, what house prices do will affect the gain calculations but the longer you live in a property the better it is from a CGT point of view.

As it says in HS283, the value of a property when it is let is irrelevant as far as calculating the gain is concerned. Take the sale price and deduct the purchase price, the costs of buying and selling and the cost of improvements and you have the gain.

Customer: replied 3 years ago.

I have looked at the HS283 as you suggested for guidance to my question. On page 3, it says that the final 36 months of your period of ownership always qualify for relief regardless of how the property has been used. I am a bit confused as I am trying to equate with your original answer.

Expert:  TonyTax replied 3 years ago.

The last 36 months relief was reduced to cover the last 18 months only with effect from 6 April 2014 as you can see here.

If you live in the property for the last 18 months of your ownership of it, you haven't lived in it at any other time during your period of ownership and you each make a make a gain of £65,000 with the first £11,000 being exempt, you will each have a taxable gain calculated as follows:

Total period of ownership: 142 months

Exempt gain (due to occupation): 18/142 x £54,000 = £6,845

Letting period gain: 124/142 x £54,000 = £47,155

Letting Relief: £6845 (lesser of £40,000, £6,845 and £47,155)

Taxable Gain £40,310 (£54,000 - £6,845 (Main residence Relief - £6,845 Letting Relief)

Customer: replied 3 years ago.

This may be an automated feature of "just answer" , but overnight I have received 6 chasing emails asking for a rating of your service. I do not take kindly to this.

Perhaps the problem is that you are sending answers which looks like from the USA.

I will rate your service once my wife and I have had time to read and digest your response.

Expert:  TonyTax replied 3 years ago.
I'm afraid that I have no control over the emails you have received. They are system generated. I will send your concerns to Just Answer.
All I do is answer questions on UK Tax in which I have 35 years of experience, from the UK. Just Answer is a US based business. The experts who work on the site are all independent contractors working from their homes.
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Customer: replied 3 years ago.

Thank you for explaining the situation to me.