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bigduckontax, Accountant
Category: Tax
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I have a query about Capital Gains Tax. Purchased my existing

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I have a query about Capital Gains Tax. Purchased my existing flat in 2001 (in my sole name) for £135k and it's now valued at £400k therefore capital gain is around £265k. My wife and I would now like to "let-to-buy", i.e. use some of the equity to purchase a second home that we'd live in (with a joint mortgage in both our names) while renting out our existing flat as along-term asset (the mortgage £54k could be repaid easily in a few years).

What we would like to understand better is the Capital Gains Tax aspect, i.e. how would the tax-free capital gain on our existing property be affected if we rented it out but decided to sell it in (say) 2 years or in 10 years when I plan to retire?

BTW My wife and I are UK nationals - I am a higher-rate taxpayer, she is Basic Rate.
Hello, I'm Keith and happy to help you with your question.

When you buy your second home you have two years in which to elect for one or the other to be classed as your sole or main domestic residence. Without such an election HMRC will determine the Capital Gains Tax liability on their perception of the facts.

The capital gain on your existing residence will be entitled to Private Residence Relief for a proportion of your occupation time against your total ownership time in months so if you sold it in 2 years or 10 years it would be of the order of 14/16 or 14/24 respectively. For the balance you will be liable for CGT at 28% on the appropriate proportion of the gain although you do have a Annual Exempt Allowance of 11K and you would be entitled to Letting Relief also. You will appreciate I cannot give full details without more quantitative data which, of course, is not yet available. Your wife does not come into the calculation at all as the flat is in your name only.

I do hope I have thrown some light on your position if you decide to proceed as planned.
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Thank you for your excellent support.