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Sam, my husband and I own and have lived in our property

Customer Question

Hi Sam, my husband and I own and have lived in our property for 5 years. We are considering moving to the Republic of Ireland, we intend to initially rent to make sure we like it before purchasing a property there. In order to have money for a possible purchase and also to leave our options open should we not like life in Ireland, we would re mortgage our property here in the UK and rent it out for a year or two. If we decided to buy in Ireland and subsequently sell our UK property, would we be liable to pay Capital Gains Tax. If so would it be on any increase in the price of the property from now to such time as it was sold ? and what would be the percentage we would have to pay in Capital Gains.  For example: At the moment our property is valued at £270,000. If we were to sell in say 2 years time and let us assume the property has gone up in value by £25,000  to £295,000. What would our CGT liability be? Many Thanks Margaret

Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.

Hello Margaret, I am Keith, one of the experts on Just Answer, and happy to help you with your question.

Yes you would be liable to Capital Gains Tax (CGT) on the gain made on the ultimate sale of your property. For this purpose increases in value are deemed to rise evenly over the period of ownership. The gain is calculated by taking the selling price leass costs of sale. From this deduct the acquisition price which is the purchase price plus purchase costs plus improvements eg installation of double glazing, central heating, extensions etc, but not routine maintenance. You now have a gain.

However CGT will only apply to that proportion of the gain during which it

was let out. At point of sale you take the total ownerhip time in months and the total time let in months. From the latter deduct 18 as you are deemed to be in occupation for the last 18 months even if this is not the case. The time let in months less the 18 is put over the total ownership time to derive a factor which applied to the gain gives the amount upon which tax might be applied.

But soft, you bothe are liable for half of the gain each and you both have an Annual Exempt Amount (AEA) of 11.1K to offset any gain. Furtermore, you will be entitled to Lettings Allowance up to 40K instead of your AEA.

CGT is at 18% or 28% or a combination of the two rates depending of the individuals' income including the gain in the year of sale.

Simple, as the meerkat in the TV advert would say! You might well find the actual tax impost minimal. Finally, when you quit these shores for good do not forget to send your tax office a Form P85, available on the net, for HMRC to classify you as non resident.

Mortgages do not come into the CGT equation, however the interest element is allowable against rental income. The following are generally regarded a deductible [source, Which]:

'The most common types of expenses you can deduct are:

  • water rates, council tax, gas and electricity
  • maintenance and repairs to the property (but not improvements)
  • contents insurance
  • interest on a mortgage to buy the property
  • costs of services, including the wages of gardeners and cleaners (as part of the rental agreement)
  • letting agents' fees
  • legal fees for lets of a year or less, or for renewing a lease of less than 50 years
  • accountant’s fees
  • rents, ground rents and service charges
  • direct costs such as phone calls, stationery and advertising for new tenants

The expense should be incurred wholly and exclusively as a result of renting out your property'

I do hope that I have helped shed some light on your proposals.

Customer: replied 2 years ago.

Hi,

I think I can understand what you have explained. The only one thing I am still not sure about is: If CGT is calculated on any increase in value of the property as it stands at the moment, which is £270,000. Or is it calculated at the price we purchased it for in 2010, which was £210,000. We have lived in the property from that time and it has been our main residential home. Would you kindly clarify this for me.

Many Thanks

Expert:  bigduckontax replied 2 years ago.

Firstly, most people do not realise that when they sell their home, any gain is liable to CGT, but if they, as most do, have lived in it continuously, they are entitled to private Residence Relief (PRR) which is at 100% of any gain.

What is happening in your scenario is that PRR applies to only a part of the gain, the occupation time plus 18 months. It is this factor which I explained in my answer is the proportion factor.

The current value is irrelevant, The gain will be calculated on the original 2010 purchase price of 210K against the future selling price, again as I explained in my answer. For CGT purpposes value are deemed to rise evenly with time. Of course, we all know that this is not the case, but that is how CGT works.

I do hope this has cleared the air for you Margaret.

Please be so kind as to rate me before you leave the Just Answer site.

bigduckontax, Accountant
Category: Tax
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Expert:  bigduckontax replied 2 years ago.
Thank you for your support.

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