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bigduckontax, Accountant
Category: Tax
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Hello This is the first time were venturing into being

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This is the first time we’re venturing into being landlords and would like to understand how income tax and capital gains is calculated when we sell the property in the future, assuming no changes to current tax law.

This is the scenario:
• We purchased property A in 2001 for £150,000 in which we lived in as our only home until 2014.
• In 2014, property A is valued at £600,000.
• We released equity on property A in 2014 to the amount of $450,000 to buy property B to move into.
• We then let out property A for four years.
• We sell property A in 2018 for £700,000.
• Property A is in joint names (husband and myself).
• Rental estimate on property A: $1600 per month
• Mortgage interest estimate on property A: $1200 per month

• What do we need to consider when filing a self-assessment for our income tax on rental income? What is tax deductible?
• How do we calculate CGT when we sell property A in 2018?
Hello, I'm Keith and happy to help you with your question.

Rental income can be offset by various expenses. The most obvious are council tax, repairs, utilities, management fees, legal fees etc. For repairs you can elect to deduct 10% of the rental or use actual costs; you may find the 10% easier and simpler to utilise. The interest element of the mortgage repayments can also be used to offset the rental. So on a monthly rental of 1.6K and an interest element of 1.2K, leave off 10% wear and tear = 0.24 x 12 = 2.9K taxable less the other outgoings, round figure calculations. You are deemed to own the property equally so that is 1.45K each added to your income tax liabilities.

Items like new kitchens, installation of central heating are not allowable; they come into the CGT equation. These costs are added to the purchase price to inflate it and reduce the capital gain in the event of s future sale.

When you sell property A you will be liable to CGT on any gain made. This is reduced by your occupation as your sole and main domestic residence. Work out the total ownership period in months. Do the same for the let period and from that latter figure deduct 18 as the last 18 months of ownership don't count for CGT purposes. On a rough estimate only 48 - 18 = 30 so only 30/204 would be subject to CGT. CGT assumes prices rise steadily over the life of the property so your gain will be 700K - 150K = 550K @ 30/204 = say 81K or 40.5K each. You each have an Annual Exempt Allowance of 11K so now it is down to 30.5K each.

This is taxes at 18% or 28% or a combination of the two depending on the individual taxation position of you both. But soft, you have another relief called Letting Relief (LR) to come into play. This is the lesser of 40K each and the Private Residence Relief (PRR) which you have when you were in occupation. Your PRR is 550K at 174K, your gain is 30.5K, your letting relief is a possible 40K and your LR is the lesser of of the three thus eliminating the gain for GCT purposes. There is unlikely to be any CGT to pay on the scenario as presented. However, CGT is a thoroughly nasty tax with a horrible habit of rearing up it's ugly head and biting you when you least expect it. I would advise you to retain a trusted, local professional in this matter when you come to sell. The solicitor who handles the conveyance would, I suggest, be the first port of call.

Please always bear in mind Benjamin Franklin's dictum that in life there are but two certainties, death and taxes. I do hope I have thrown some light on what can be a highly complex area of taxation, CGT in particular.

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