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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15950
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I am a divorced woman with 2 grown children and when I die

Resolved Question:

I am a divorced woman with 2 grown children and when I die I wish my sons to benefit from my estate. I have a question regarding property. I purchased a run down house in 2010 for £165,500 and spent £65,000 renovating it. I am living in it and it is currently valued at £320,000. I now need to buy a home on one level as I have mobility problems. If I should purchase another property as my main home and let this house out to tenants and didn't live in it again, on my death, how would inland revenue work out how much tax I would have to pay on the gains from this property? I am wondering if I should sell this home to realise the gain rather than rent it out? Advice would be gratefully appreciated.
Thanks you
Lesley
Submitted: 3 years ago.
Category: Tax
Expert:  TonyTax replied 3 years ago.

Hi.

If you sell the property you currently live in, you will have no Capital Gains Tax to pay so long as you sell it within 18 months of moving out as it will have been your main residence. However, see page 4 and example 6 on periods of absence in HS283 here.

If you let the property you currently live in and it was let until your death, the value of that property when you die will be included in your estate for Inheritance Tax purposes. Currently, the first £325,000 of an individual's estate is exempt from IHT or more accurately is charged to IHT at 0%. The excess is charged to IHT at 40%. There would be no CGT unless your executors sold it for more than it was worth when you passed away. On death, your record of usage of the property ceases to be relevant.

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

Customer: replied 3 years ago.
Thank you but this is not all I need to know as I would not keep this house let out until I die. I was thinking of letting it for perhaps 5 years, then selling it. How would inland revenue work out how much capital gains I have made? Bearing in mind it is worth £325000 now, and if I sold now I could keep all of the profit as it is at the moment my sole home. I want to know if it is better to realise the profit from it by selling now and purchasing another to let out. If I let this house out now, instead of selling, and sold in 5 years.....would I have to pay tax on this profit from the purchase price of £165,000? I hope I have made myself clear as this is very important to me as I am trying to decide whether to sell or rent it out.
Expert:  TonyTax replied 3 years ago.

I could explain the principles but its easier to get them across using figures.

Can you tell me the month in 2010 you bought the property and how long it was before you could move into it given that it needed work doing to it. What did you spend the £65,000 on roughly. Can you give me a figure as to what you think it may worth in five years or should I use the £325,000 figure?

Customer: replied 3 years ago.
I purchased the property in November 2010 and moved in 6 months later. I completely gutted house and re roofed. It needed structural steelwork, insulation, rewiring, new central heating system, plastering, flooring , rebuilt garage and sanitary ware etc. you could use 325,000 or more......whatever is the best illustration for me. Thank you very much for your help...I might not pick up your reply for a,while as I have to go out now.
Expert:  TonyTax replied 3 years ago.
Thanks.

Leave this with me while I do some calculations. It will take a while so please bear with me.
Expert:  TonyTax replied 3 years ago.

Hi again.

As you moved into the property within 12 months of buying it, the period of six months before you actually moved in is treated as a period of occupation by you.

If you let the property from January 2015 and sell it in November 2019, by that time you will have owned it for 109 months of which you will have lived in it for 50 months and let it for 59 months. The gain for the period that you occupied the property as your main home will be tax free as will the gain for the last 18 months of ownership. If the property was sold and you made a gain of £89,500 (£320,000 - £165,500 - £65,000), then £55,835 would be exempt from CGT (£89,500 / 109 x 68). The balance of the gain of £33,665 would be gain for the period the property was let excluding the gain for the last 18 months of ownership (£89,500 / 109 x 41).

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:

1 £40,000,

2 the gain covered by the period you lived in the property and the last 18 months of ownership which would be £55,835 and

3 the letting period gain of £33,665.

Letting relief of £33,665 would reduce the remaining gain of £33,665 to £0 so you would have no CGT to pay.

If the property increases in value over the next five years, then you may have CGT to pay as letting relief is limited to £40,000 per part owner. Obviously, tax rules may change in the future so the tax position could be completely different to that of today.

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