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TaxRobin
TaxRobin, Tax Consultant
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Experience:  International tax
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I bought my first home, a flat, in October 2004 for £220,000. It

Customer Question

I bought my first home, a flat, in October 2004 for £220,000.
It was always my intention to live there, and I lived in it for a short period of time, then went overseas for a few months, and rented the flat out.
Since returning to the UK a few months later, and until now, I have always rented elsewhere and not lived in my flat.
I have recently negotiated a lease extension of 99 years on top of the remaining 60 years for a premium of £40,000 plus fees of around £8,000.
With the renewed lease I'd expect to be able to sell it for £375,000
I have never owned another property but I’m considering buying something else in the next year or two. I will need to sell this flat into order to buy elsewhere.
Being my first and only property, but not having lived in it, when I do come to sell it in order to buy something else would I be subject to capital gains tax? If so is the cost of the lease extension (plus fees) taken into consideration and how is it all calculated? If I start living in my flat now (which is a realistic option) at what point would I become exempt from capital gains tax?
Submitted: 11 months ago.
Category: Tax
Expert:  TaxRobin replied 11 months ago.
HelloThe long lease is a part disposal. To calculate the gain arising on the part disposal, any allowable expenditure (apart from the costs of disposal) is apportioned between the freehold reversion or superior leasehold interest retained and the lease granted. This is done by applying the fraction A/(A + B) to the allowable expenditure, as for part disposals of other assets, but with one difference.For the granting of a lease:A is the premium or consideration received for the grant of the leaseB is the value of the interest retained which includes the value of the right to receive the rent due under the leaseYou can not exclude under Residence relief for the leased time and the amounts you received. If you did move in now you could exclude the time you actually lived in the flat and the last 18 months you owned but the proration of the gain would be required.This can be complicated. You can read all about leases granted here:https://www.gov.uk/government/publications/land-and-leases-the-valuation-of-land-and-capital-gains-tax-hs292-self-assessment-helpsheet/hs292-land-and-leases-the-valuation-of-land-and-capital-gains-tax-2015
Customer: replied 11 months ago.
HelloI'm not sure what you mean when you say the “long lease is a part disposal”.If your understanding was that I own the freehold of the property and recently granted a lease extension to someone, for which I received £40,000, this is not correct.Just to be clear, I do not own the freehold but was granted a lease extension by the freeholder for which I paid them £40,000.My understanding now is that no amount of time living there would exclude me from CGT, it had to have been my home and main residence throughout my period of ownership.
Are there any other allowances against CGT such as the cost of any improvements made to the flat.
Could you show me a CGT example calculation for a lower rate tax payer based on the figures I provided, if I were to sell the flat today?
Expert:  TaxRobin replied 11 months ago.
Thank you for clarifying that lease situation. I was under the impression that you were thinking to grant a lease.Your improvements are added to your cost. The lease amount you pay is also part of your cost. The last 18 months and the time you did occupy the property are allowed under Private Residence Relief.You must have lived in your home as your only or main residence at some point while you owned it. The last 18 months are automatic.If you sell for £375,000 then you look to the difference in that and your cost (plus the extended lease payment and improvements).You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount). The tax free allowance is £11,100.You’ll either pay 18% or 28% tax on your gains if you’re a basic rate taxpayer. How much you pay depends on the size of your gain and taxable income.Work out how much taxable income you have - deduct your Personal Allowance and any other Income Tax reliefs you’re entitled to.Work out your total taxable gains. (£220,000 + £40,000 + improvements - costs to sell - £375,000) Your Private Residence Relief for the time you are allowed is now used to reduce the gain. You have 115,000 gain because somethings are not known (like improvements and costs to sell). When calculating the proportion of the gain eligible for relief, you multiply the gain by a fraction equal to the periods of occupation (including the final 18 months) divided by the period of ownership. 147 months from 2004. 115000 x 18 months + months lived in it before rental divided by 147.Deduct your tax-free allowance from your total taxable gains. (£11,100)Add this amount to your taxable income. If this amount is less than the basic Income Tax band (£31,785 for the 2015 to 2016 tax year) you’ll pay 18% Capital Gains Tax. You’ll pay 28% on any amount above this. You can fill in the unknowns and should be able to see what your relief will be.

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