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You will be entitled to Private Residence Relief (PRR) for the period you lived there and for the last 18 months of ownership when you are deemed to be in residence even if this is not the case. Assuming that you sold now your Capital Gains Tax (CGT) liability could be calculated as follows. Total ownership time is say 147 months. Occupation time is 89 months. 147 - 89 = 58 so 58 / 147 = say 40% of the gain would 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.
Your gain is 845K so at 40% 338K would be exposed to CGT. However, you have a non-cumulative Annual Exempt Amount of 11.3K and Lettings Relief (LR) of 40K to deduct leaving 286.K of gain with a worst case scenario of a tax bill of a tad over 80K.
What you do with the money is irrelevant in terms of the current CGT bill. When you sold again at some future indeterminate date CGT would apply again. CGT is s thoroughly nasty little tax likely to rear its head unexpectedly. I had one customer who bought his son a house to attend Uni. The son stayed in it for years after and when it was eventually sold the father was landed with a 37K CGT bill for a dwelling he never enjoyed.
I am so sorry to have to rain on your parade.
The gain is calculated from the difference between the net selling price ie after deducting selling costs including advertising and the acquisition price which is the purchase price plus purchase costs plus improvements eg installation of double glazing, central heating, but not routine maintenance which would be allowed against rental income.
Now suddenly you are saying 'we' when originally you indicated that you were the sole owner. If that is not the case then the whole ball game changes. Unless the expenditure was improvements then it has no effect on the computation of the gain.
Your gain is 422.5K each at 40% would be 169K. Now deduct AEA of 11.3 and LR of 40K leaves 117.7K taxable. I cannot calculate the tax more exactly without details of individual income in the sale year.
The expenditure on improvements like double glazing, central heating installation, extensions etc can reduce the amount taxable. I need a more accurate indication of this to determine liability.
For you take 117.7K - 13.5K = 104.4K which at 28% would be say 30K then ad 13.5 @ 18% = say 2.5K so total tax bill a tad under 32K.
For wife 117.7 - 20.5K = 97.2K which at 28% would be say 27K then add 20.5K @ 18% = say 3.7K so total tax bill of some 24K.
Thank you for your support.