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Sam, Accountant
Category: Tax
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Experience:  26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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Please help. I bought a house jointly with my partner in 2005

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Please help. I bought a house jointly with my partner in 2005 and rented out my flat which I bought in 1998. I have never done tax return as I was advised incorrectly that I didn't have to do so if the rent only covers my cost.
I bought the flat under shared ownership. the full asking price at the time £80,000. My share was £40k. The flat is now worth £400k and a buy to let.
I would like to know my best option. sell the flat but that is likely to cost me dearly in CGT or sell the house and move back to the flat and use the proceeds from the sale of the house to pay off the mortgage on the flat. The tenants moved out 6 March 2014 so I am now paying two mortgages whilst I make a decision.

Thanks for your question, I am Sam and I am one of the UK tax experts here on Just Answer.
First you need to remedy the fact that you did not declare rental income to HMRC - and of course claim the relevant expenses such as interest payable on the mortgage, repairs, insurance etc
It may be that you are correct and owe no tax, but this still needs to be disclosed.

Then as far as the capital gain position is concerned, you will be due exemption under private residence relief, for the time that you lived there, plus the last 18 months of ownership AND also private lettings relief, as this was once your main residence and you let it out to tenants. Private lettings relief can allow up to a maximum of £40,000 further relief.
You advise that the property was originally under shared ownership - did you buy the further 50% share? If so when and what price (was it the balance - £40,000)
Did you carry out any capital improvements - such as new bathroom, new kitchen etc ?
Is the flat still in your sole name ?
I can then advise the capital gain position.



Customer: replied 4 years ago.
The flat is in my sole name.
The remainder of 50% was bought in 2003 and the housing association received £82,500 plus their legal cost paid. The flat now requires a new kitchen and bathroom. I also pay service charge, gas certificates etc.

Thanks for your response and the additional information.

The service charges and gas certificates - are expenses to be deducted from the rental income.

Then the capital gain position will be the sale price of £400,000 less the purchase costs of £82,500, which leaves £ 317,500
From this £317,500 you then can deduct the costs to buy and sell (such as the legal fees and any estate agent fees) and if you replace the bathroom and kitchen these too are deductible from the gain, as these are capital improvements.

With this final figure - which I estimate to be around £305,000 tax reliefs are then considered.
At todays date you have owned this flat for approx. 192 months and this was your main residence from approx. 84 months.
So the 84 months plus the last 18 months of ownership (this was 36 months but changed with this years budget to 18 months) total 102 months, form the exemption for private residence relief.
So £305,000 x 102/192 = £162,031 exemption
This leaves £142,969 to consider
Then you will be due the full lettings relief (as long as you remedy declaring the rental income to HMRC) of £40,000
This leaves a gain of £102,969
The first £11,100 is exempt as this will be your annual exemption allowance - which leaves the final position of £91.869 liable to capital gains tax.

The rate at which you pay capital gains is determined by your annual income, If you annual income is more than £42,475 then the gain will be fully charged at 28% = £25,723.32 but if your annual income is less than £42,475, then the amount equal to the difference between your annual income and £42,475 will allow the same amount of gain to be charged at 18%, and then any remaining gain charged at 28%.

But worse case scenario - you will have a capital gain bill of around £25,723.32 ( the periods of ownership and time lived there and the costs to sell and buy and capital improvements will all need firming up)
This, I am sure will help you decide whether to sell the house - which will give rise to no capital gain, as its been your main residence throughout,. or sell the flat.

However if you sell the house and move back into the flat - there will always be a capital gain to consider, due to this period of absence - so if and when you sell in the future, this still be need to be a consideration.



Customer: replied 4 years ago.
Dear XXXXX, thank you so much. This is most helpful.
Lastly, I have a couple of questions.
There is a mortgage outstanding of 180k on the flat so if I pay that off with the proceeds of the sale of the house, is the CGT then becomes deferred?

I understand that if I sell the flat and buy another buy to let the CGT is Also deferred. However am I allowed to use some of the sale money elsewhere such as clearing the outstanding mortgage on the house which is currently 170k repayment mortgage.

I thank you so much as I was at my wits end.

Hi Sylvie

Thanks for your response and further questions

I am afraid the mortgage has no bearing on the capital gain position, nor does selling the flat and buying another (as this is not a business asset and its only business assets that allow any deferral - rental income is a property that generates rental income is not considered to be a business)

I am afraid the capital gain position is as already advised, and other than fine tuning the figures and the periods of time - there is no circumstance when you can defer the capital gain position.

Do feel free to ask any further follow up questions, but it would be appreciated it if you could rate the level of service I have provided, as this ensures I am credited for my time



Sam and other Tax Specialists are ready to help you
Hi Sylvie

I hope you found the information useful - do let me know if you have any follow up questions


Customer: replied 4 years ago.
Dear Sam
On registering for tax returns will I have to back date this to when the flat changed to a buy to let?

Hi Sylvie

Thanks for your further question.

Declaration of the rental income will need backdating from when the rental income first began, which you advised was 2005 (so if this is when the mortgage changed to a buy to let, then yes)