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bigduckontax
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 4333
Experience:  FCCA FCMA CGMA ACIS
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I bought a flat for £120 000 in September 2013. I rented it

Customer Question

I bought a flat for £120 000 in September 2013. I rented it out a month later. I've never lived there. I extended the lease and now want to sell the flat. The value of the property is £220 000 which means that my profit is £90 000. My current income is about £20 000 a year but it was bigger last tax year. From my calculation I'll have to pay between 18% and 20% CGT which is almost £20 000. It is the same amount that I received from renting it out. Which means that I basically had to pay all my property income back to cover CGT. I earned £90 000 but since I want to buy a new flat that earning doesn't mean much since the property market was increased in London. It make no sense to me and I wonder if there are any ways to legally minimise my tax.
As far as I know since I've never lived in the property I'm not qualified to apply for letting relief either.
Could you please advise me what I can do in this situation.
Thank you,
Veronica
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello Veronica, I am Keith, one of the experts on Just Answer, and happy to help you with your question.
Here is the advice from the Property Tax Portal [edited]"
'HMRC states that the private letting relief can be used where
you sell a dwelling house which is, or has been, your only or main residence, and
part or all of it has at some time in your period of ownership been let as a residential accommodation.
The amount of private letting relief that can be claimed cannot be greater than £40,000'
As you surmise in your question you are not entitled to Lettings Relief.
Thus your CGT liability would be calculated as follows, 220K - 120k = 100k less your Annual Exempt Amount of 11.1k leaves 88.9K liable to CGT.
But soft, all is not lost as you can defer this liability by using Roll Over Relief provided you buy your new property within the specified period.
There are, however two further points to consider. The purchase price for CGT is inflated by the cost of purchase plus any improvements made eg installation of central heating, double glazing or extensions. Also the selling price is the net receipt after the cost of sale is taken into account. This may reduce the actual gain. The second point concerns the wording of the relevant Act which states 'sole or main domestic residence' HMRC practice is to interpret this as 'sole and main domestic' which is not the case so were the property the only residential accommodation you owned you might avoid any liability for CGT altogether, but I caution you that you will be in for a fight and possibly need local professional assistance to fight your corner with HMRC.
The worst case scenario is a CGT bill of some 25K. CGT is levied at 18% or 28% or a combination of the two rates depending on your income including the gain in the year of sale. Of course if Roll Over Relief is available then the liability is deferred to some future date.
I do hope that I have shed some light on your position for you Veronica.