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TonyTax
TonyTax, Tax Consultant
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I'm wondering if I own a property that was bought as my own

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Hi, I'm wondering if I own a property that was bought as my own home, but I moved into rented and have a tenant on there, if I sold it now to buy my own home where I am currently renting, would I have to pay capital gains tax on it, as it is my only home I own and I am using the proceeds to get out of the renting trap and buy a house where I have moved to?
Assistant: What are the assets or property for this capital gain?
Customer: What do you mean?! So it's a flat worth about £190k which would be going straight back into a mortgage for my new home
Assistant: Anything else you want the Accountant to know before I connect you?
Customer: Just wondering if I need to move back in there first and if so, how long for, or if this would be taken into account. It feels unfair, I only moved into rented to be closer to my partner and a new job, as we both had major health problems at the time. I wasn't well enough to sell up straight away and had had to give up my job due to burnout so I have had to wait until now to be mortgage again, hence the being a gap before we could buy! But I never bought the property for income gain, it was my home.

Hi. My name is*****'m looking at your question now and will post my answer or ask for more information here in a short while.

How long has the property you own been let?

Customer: replied 12 days ago.
Since 2016

Which month?

Customer: replied 12 days ago.
September

Thanks.

Leave this with me while I draft my answer.

Customer: replied 12 days ago.
Thank you

If you sold the property today or by 5 April 2020 then you will get the gain for the period you lived in the property as a CGT free gain. In addition, you would be given the gain for the last 18 months of ownership during which you have not been living in the property as a tax free gain. So, as of now, about 21 months worth of the gain would not be exempt from CGT. However, you would be entitled to letting relief of the lesser of:

1 £40,000,

2 the sum of the gains covered by your occupation of the property and the last 18 months of ownership and

3 the gain for that part of the letting period not covered by the last 18 months of ownership.

The letting relief may or may not cover the gain for the 21 months potentially exposed to CGT. The first £12,000 of gains an individual makes in any one tax year are covered by the annual CGT exemption.

From 6 April 2020, the CGT rules around the private residence are changing significantly. For exchanges of contracts after 5 April 2020, the last 18 months relief is being reduced to one of 9 months and letting relief will only be available to those landlords who occupy the property at the same time as the tenant.

See HS283 and here for more information.

I hope this helps but let me know if you have any further questions.

Customer: replied 12 days ago.
Hi, so can you clarify what the letting relief means and what this means for me in practice? I bought the property for £134,950 in Oct 2016. If I sell it for £190k before April 2020, how much would I pay in CTG? I pay the lower rate of tax, my salary is £26475 plus the tax return has shown about 6k profit each year from my tenant. How is Capital Gains Tax collected? Is it taken off as part of the sale or done as part of the tax return? And if so,would
it put me into the higher rate for tax for this year and the higher rate for CTG?

Let me do some calculations.

You said you bought the property in October 2016. You also said earlier that it had been let since September 2016. Please clarify. I cannot provide an accurate answer without accurate information.

Customer: replied 12 days ago.
Oh, I'm sorry! Bought in October 2013.

Thanks.

Letting relief reduces your taxable gain. It's in HS283. The calculations are much simpler than people think.

Gain: £55,050 (£190,000 - £134,950)

Total period of ownership to 5 April 2020: 78 months

Period of occupation by you: 35 months

Period of letting: 43 months

Exempt gain: £37,406 (£55,050 / 78 x 53 (35 months + last 18 months of ownership)

Letting period gain: £17,644 (£55,050 / 25 months (43 months - last 18 months of ownership)

Gross Non-Exempt Gain: £17,644

Letting Relief: £17,644 (lesser of £40,000, £37,406 and £17,644)

Net Gain before annual CGT exemption: £0

Provided you sell by 5 April 2020 you will have no CGT to pay.

If you sell after 5 April 2020, you will lose the letting relief of £17,644 and £6,352 of the last 18 months relief, ie you will have a taxable gain of £23,996. Deduct the annual CGT exemption of £12,000 and you would pay CGT at 18% on £11,996 (£2,159.28). The gain is added to your income to determine whether you pay CGT at 18% or 28% or a combination of the two rates.

If we have a change of government in December 2019, CGT will probably change quite significantly. I suspect the rate will go back to what it was in 2008, ie 40%.

Customer: replied 12 days ago.
Thank you, that's great. So no CGT if I sell soon? Excellent! I am a Labour supporter but this is the one bit that's worrying me...if they get in, could they change that instantly or is it a bill that would need to get through parliament etc? (I'm sorry - I know this is a tax and not a politics discussion, but you probably have a better sense than I do!)
Customer: replied 12 days ago.
one last question - is the total gain gross added to my income, eg the £55k to calculate the rate of tax for CGT? And would this also affect my rate of tax for income for the tax year or just the CGT rate? Thank you.

They could change the CGT rate so that it goes up after they are elected for 2019/20 and you end up with two different systems in one tax year and the one you are affected by is determined by when you sell the property. That may not happen and any changes may be effective from 6 April 2020. From a tax geek's point of view a Corbyn government would be interesting. If I'm honest, those with money have done well out of the current government and some re-balancing is needed. CGT is too low compared to Income Tax and it's only those with money who generally pay CGT.

Customer: replied 12 days ago.
Yeah, it's my one bug bear! I'm not rich, and I ended up in this situation because I couldn't afford a home where I am now, and it feels unfair to be taxed on it like it's a second home when it's the only one I own. There is no chance of me selling before the election though, so I'm going to have to have fingers crossed and all eyes on selling before April either way I think!

The net taxable gain is what is added to your income to determine the tax rate. That's obvious from my calculation of the CGT if you sell after 5 April 2020.

Good luck with the sale. I know many people sweating on the election result for the same reason as you.

Would you mind rating my answer before you leave the site please.

TonyTax and other Tax Specialists are ready to help you
Customer: replied 12 days ago.
Thank you!

Thanks.