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bigduckontax, Accountant
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I currently own a flat (have done years), I am looking to

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I currently own a flat (have done for 8 years), I am looking to buy a house and turn the flat into a rental property. I assume I can designate the new property my primary residence and the flat an investment property?
If so, how will capital gains tax be calculated when I come to sell it the flat? Is there a grace period in which I can sell it without capital gains tax? If so how long is this period. Once this is over how will the tax be calculated? Will the initial price I paid for the property be used or will the value of it when it became an investment be used? If it is the later how is this value calculated? Am I able to get a valuation now and use it later or will HMRC calculate it in some random way?
Finally, am I still able to offset the interest on the mortgage against any rental income to calculate my income tax? Is the cost of paying an agent to manage it also tax deductible?
Both properties are located in England, as am I. I am also a UK resident and tax payer.
Submitted: 6 months ago.
Category: Tax
Expert:  bigduckontax replied 6 months ago.

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.

I do hope that you have found my reply of assistance.

bigduckontax, Accountant
Category: Tax
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Expert:  bigduckontax replied 6 months ago.

Thank you for your support.

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