Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.
You have two years in which to advise HMRC which property you elect Private Residence Relief (PRR) to apply. This can be done by merely writing a letter to your tax office. For the rental period of your flat, assuming that the election for your new residence has been made, you will be liable for Capital Gains Tax (CGT) on the proportion of your rental period less the last 18 months in which you are deemed to be in occupation even if this is not the case and your total ownership period. From this can be deducted your non cumulative Annual Exempt Amount (AEA) of 11.1K and Lettings Relief (LR) up to 40K. the balance will then be exposed to CGT at 18% or 28% or a combination of the two rates depending on your income including the gain in the tax year of sale.
The gain is calculated from the difference between the acquisition price and the net selling price. the former is what you originally paid for the flat plus purchase costs including Stamp Duty plus improvements eg installation of double glazing, central heating extensions etc. The net selling price is just that less costs of sales including advertising. The gain is assumed to rise evenly by time over the whole ownership period. In this case there is no requirement to obtain a current market value, another expense spared.
The interest element only of a mortgage payment may be used to offset rental income, but only at the basic rate of tax [new rules coming in 2017 - 2020]. Also the previous allowance of 10% for wear and tear from rentals is abolished in favour of actual expenditure again under the new rules. Agents fees are allowable against tax in the rental computation.
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