Does anyone know the answer to this? Capital gains tax

[gaharghgah]

I am one of the lucky thousands stuck in a flat that I can't sell due to a lack of an EWS1 form. I have been trying two years, one failed sale right at the point of exchange and £3k later, I am still here. I am very .

I desperately need to move, my only option now seems to be to rent out the flat, and rent somewhere myself in the place I want to move to. I have no idea about any of this stuff, have absolutely no desire to be a landlord at all, but can't see any other way out.

My question is, if I did do this, when at some point in a few years my flat is (hopefully) sellable again, would I have to pay capital gains tax on it, as I haven't been living there? Even if it was the only property I owned?

According to this page you might have some tax to pay: www.gov.uk/tax-sell-home

thanks, I did have a look at the page but I'm still not sure, it says you need to pay it on buy-to-let properties - but it's not a buy to let, I bought it to live in it! Does me moving out and renting make it a buy to let?

Click on the linked page "if you let our your home."
I think the worked example is similar to your scenario isn't it?

I think capital gains tax on a principal private residence works as follows:

1. Take the price you end up selling it for, less costs to buy originally and to sell.
2. Take off the price you bought it for to give the gain.
3. Work out the proportion of the gain which is eligible for relief as follows...

A) all years you lived in it are eligible for relief. B) if you then rent it out, then you can get a portion of the gain covered by lettings relief, but this can be a bit complicated: www.gov.uk/government/publications/private-residence-relief-hs283-self-assessment-helpsheet/hs283-private-residence-relief-2020#letting-relief C) then there's a few months that cover gaps in living in places (up to 18 months I think).

So e.g if you had lived in your flat for 10 years, then rented it out for 5 years... You bought for 50k and sold for 200k then you would get an initial gain of 150k. Of that, I think it would be 10/15s PR relief, so 100k. Then the remaining 50k would have been gained through letting so you get the lower of PR, 40k or the gain - so I think it would be 40k. Then you end up with a chargeable gain of 10k.

Then that would eat up your capital gains allowance 12.3k so you wouldn't end up paying any tax net. But it will vary depending how long you spent living in your flat Vs renting it out and I'm not certain if the final 18 months thing applies to reduce the letting part (which would mean a lower chargeable gain) or not.

Obviously if it was a very large gain the chargeable gain might exceed capital gains allowance and then you would pay CGT at 18% for the portion of the gain up to the higher rate tax band (e.g. if you already earn in the higher rate band £0) and 28% above because it's residential property so higher rates apply.

Yes but only on the amount it has increased in value. This is regardless of mortgage and you would have to talk to a tax expert to see if it’s the value when you bought it or the value when it became a buy to let.
There is a suggestion that capital gains will increase in the future.
It is a complex calculation but you can use the HMRC.
Keep any receipts you pay to have any modifications to the flat but be aware not much is deductible.
Also you now have to pay capital gains tax within 30 days of the sale but they will accept an estimate then you can include the corrected amount in you subsequent tax return for the year you sell it in.
If you are renting it out you will need to complete self assessment every year as rental is classified as additional earnings.

Look up PPR - there are rules depending on what periods you lived in the property. I am rusty on this, but I'd ask an accountant because potentially you would be subject to CGT so you need to look into it properly first.

Brilliant, thank you, that's exactly my situation. I have tried to work it out using that example and I THINK I would have to pay around £10k which is shit but doable just about.

Maybe time to speak to a financial adviser though, I definitely do not trust my math.

You will have to pay CGT, but it's based on the proportion of time you rented the flat out for.

Very roughly, if you lived in the flat for 10 years, then rented it out for a further 5 years, you would pay one third of the total CGT due (for the 5 years it was rented out of the 15 years you owned it). That's only very approximate as there are some other considerations (there is a also a period of so many months when you first rent it out that doesn't count), but that gives you a rough idea

Oh wait, there is a capital gains allowance of 12.3k? So maybe I wouldn't have to pay anything...

Blah, all so confusing.

Yes you are allowed a certain amount of gain before tax kicks in.

Thanks everyone, I think what I have learnt is that I need expert advice before I even think about this!

God, bloody bastard EWS1 saga, I can't believe how long this has been going on for with no end in sight.

Revisit the page and absorb the info. See if you can Google any other examples.
Then you might save yourself the cost of a financial adviser.

Yes you will need to pay / there is a flow chart here

zebraaccountants.com/capital-gains-tax/

It might not be much if you have lived in it though

You will also need to pay tax on rental income and cannot offset mortgage interest as an expense

You will need to let your mortgage company know that you are renting it out, get landlords insurance, put deposit in a scheme, etc

As others have said you’ll be entitled to PPR relief for the time you’ve lived there and for a few months prior to sale.
If you’re planning to sell in the next three years you’ll likely find your gain after PPR relief is below your CGT allowance.
Do you jointly own it with a partner? If so you’ll both get a CGT allowance so it may be worth looking into registering as joint ownership if your spouse isn’t included as a joint owner.
There is a new CGT return which you must register to complete online if a gain arises and tax is due. You have to complete, submit and pay within 30 days of sale where a gain/tax arises.
However if there is no gain you only have to include the details of the sale/gain on your tax return instead. As you’d be a landlord you should be registered and completing a tax return already by the time you come to sell.
When looking at what you can claim as rental expenses be sure to check what is and isn’t allowed. For example be sure to include your mortgage interest (not the full mortgage payment) on your tax return. It’s not deducted as a rental cost any more but you do get basic rate relief on it instead now.

If you are number savvy and able to negotiate the HMRC info, guidance and forms you can do this yourself. However it can be quite complicated and you might find for the time/effort involved and for peace of mind it’s been done correctly you might want to ask an accountant how much they’d charge you for a tax return including rental income and a CGT calculation when the time comes.

Should add you have to include the sale on your tax return (if you complete one - which you will be required to do as a landlord) even if you have completed the online CGT return.

@gillybean2 that's really helpful, thank you. Nope its just me, sole owner. I think you're right, if I can sell in next few years I will probs be under the threshold for CGT. Good news!

I don't suppose you know a good rental calculator online I could use to work out what I might actually be able to make in rent after tax? I have a feeling its not going to be very much, I'm basic rate now but the rental income would soon push me over the £50k threshold, so would be paying a lot of tax, not sure there would actually be enough left to cover mortgage and service charge.

Lots of info here: www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income
There are online calculators but I’ve never used them as I use dedicated software. Bear in mind they’ll only ever give an estimate of the tax due as it very much depends on your other taxable income.
If your existing income (salary etc) uses up your tax free allowance then you will pay 20% on the income after deducting allowable expenses. Not all expenses are allowable.
If the rental income pushes you into higher rates you’ll pay 20% on the amount that takes you up to higher rates and the 40% on the rest (unless you end up going into additional higher rates but that seems unlikely from what you’ve said).

The cost of an accountants fee would be an allowable rental expense if the only reason you are required to complete a tax return is because of the rental income. So you’ll save tax on the deduction but obviously this is less than the fee and you’d save more not paying an accountant in the first place.

It can be a tricky area with many pitfalls but if you are confident with numbers and negotiating HMRC guidance you can do it yourself.
If you’re not so confident after checking out the above link then look for an accountant to assist. Ring around for a quote. Remember anything they quote you will probably have VAT on top so be sure to add that on for the full cost to you. If you get a reasonable quote you may decide the time/effort/pitfalls out way the cost to you.