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Sam
Sam, Accountant
Category: Tax
Satisfied Customers: 13861
Experience:  26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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Hi we have a rental property in London which we have been renting

Resolved Question:

Hi we have a rental property in London which we have been renting out since June 2008, my wife bought the property in 1997 (mortgage then £110.00 interest only) value £115.00, we remortgaged in 2008 to raise funds to buy our now primary residence in Bristol. Our mortgage in London is now £308.00 interest only. We need to sell out London property in about 8 years time to pay off London and Bristol mortgages respectively, please can you tell us on how much we might expect to pay in Cap Gains tax or can we get around this in someway.
Many thanks
Neil Stanley
Submitted: 2 years ago.
Category: Tax
Expert:  Sam replied 2 years ago.

Hi Neil

Thanks for your question I am Sam and I am one of the UK tax experts here on Just Answer.

I am afraid there is no getting away from paying capital gains as the scene has been set although this does appear to have been your wife's main residence from 1997 to 2008, so there will be some mitigation on an element of the gain as private residence relief will be due for the period it was her main residence, and the last 18 months of ownership plus she will be entitled to private lettings relief, which will allow, up to a further £40,000 of relief.

As a rough guide to calculate the capital gain please advise

1) how much the property was valued at in 2008

2) How much extra was borrowed at this time and the outstanding mortgage on the original loan

3) Confirm that she lived here from 1997 to 2008 and the property was in her sole name and remains to be so - if not please advise further with dates

4) The approx. costs to buy so legal fees etc

5) Confirm that it has been let out throughout the period 2008 to date

6) Confirm that all rental income declared to HMRC

7) The value of the property at this time

8) Whether any capital improvements carried out on the property - such as new bathroom, new kitchen and when this was undertaken and approx. how much was spent

9) your wifes current annual income (as this determines the rate of capital gain tax)

Thanks

Sam

Customer: replied 2 years ago.

1. Approx 425000

2. Borrowed extra 220000 original loan was 100000 on interest only but paid a lump sum of 10000 off prior to 2008 so 90000 owing prior to remortgage

3. My wife's sole residence from purchase in 1996 until 2008 property remains solely in her name

4. Property purchased for 110000 with 10000 deposit and approx 1500 for solicitors conveyancing etc

5 property let from 2008 to date small break between tenants between Nov 2013 and April 2014 during which time property redecorated throughout plus new carpets and new white goods

6. All income declared to hmrc tax returns completed by my wife annually

7. Approx 750000 valued Jan 2014

8.redecorated throughout inc new carpets spent 8000

9. 40000

Expert:  Sam replied 2 years ago.

Hi Neil

Thanks for your response

The position will be as follows

Property approx. value of £750,000 less the original borrowing of £110,000 and the remortgage of £220,000 leaves an initial gain of £420,000

Less costs to but £1500 and costs to sell approx. £7500 (there are no allowable capital improvements - these are just decorating costs and capital allowances/wear and tear allowable against any viable rental income)

This leaves £411,000

Private residence relief will be due for the period 1996 to 2008 and the last 18 months, which allows approx. 162 months for the relief, whilst the property (to date) has been owned for approx. 216 months

So the private residence relief will allow £411,000 x 162/216 = £308,250 relief, which leaves £102,750 to consider

Then we consider that the property was empty from Nov 2013 to April 2014, as this currently falls within the last 18 month period, this will not affect the calculation of the private lettings relief, but once past May 2015 then it will, so be mindful of this, if the property is sold after May 2015

So private lettings relief is the lesser of

1) The amount of gain on which private residence relief is due - which is £308,250

2) The amount of gain left over, after private residence relief has been applied, which is £102,750 OR

3) £40,000

As the lesser is 3) £40,000 this is deducted form the remaining gain of £102,750 - this leaves £62,750

Then the first £11,000 (which is the annual exemption allowance) is deducted - which leaves a final chargeable gain of £51,750

AS your wife has an annual income of £40,000 - then she has £1865 unused basic rate band

So £1865 x 18% = £335.70

Remaining gain £49,885 x 28% = £13,867.80

Total capital gains bill £14303.50

Remember the rates of capital gain tax, and the annual exemption allowance are subject to change.

Let me know if you have any follow up questions, on the capital gain position.

Thanks

Sam

Customer: replied 2 years ago.

Hi Sam

Really helpful and comprehensive response thank you. Not sure if we can save this response would you be willing to email to *****@******.***

Regards

Neil

Expert:  Sam replied 2 years ago.

Hi Neil

Thanks for your response

I am afraid we do not have the facility to email customers directly, so you will need to copy and paste it to a word document to save to your own hard drive.

It does remain listed within "My Questions" for a while within your account for Just Answer but always best to also back this up with your own save facility.

Let me know if you have any further questions, If, however, in the meantime you could rate/accept the responses I have provided, this ensures I am credited for my time, and therefore would be much appreciated.

Have a great weekend

Thanks

Sam

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