Capital Gains Tax on Sale of Property

[biryani]

I'm thinking of selling my investment property but don't understand the rules on capital gains tax. It cost me £25,000; I spent about £10,000 on it and it's now worth around £200,000 minus the mortgage of £20000.I want to reinvest in other property but I'm not sure if capital gains tax applies. Anyone help me?

How long have you had the property?

Have you ever lived in it?

Basically you will probably be liable for CGT on the profit on the property after you deduct costs of improvements. There is an allowance (@10k atm) that is tax free. There is a sliding scale of percentages based on length of ownership of the asset. The stuff on hmrc website is quite useful.

You should probably talk to an accountant/IFA asap who can advise you about your specific sitution.

Hi Merylstrop. Yes- I lived in it for 13 years and let it when my DP bought a house elsewhere. Have read the HMRC site and I am confused still-perhaps I'm just thick? So if I:

calculate the profit.
take away the allowable 10k.
take away the cost of improvements.
check sliding scale percentages based on length of ownership.

That should do it? Sound simpler than on HMRC.

something like that.
worth getting expert advice though as yoru profit is pretty hefty and therefore so will be the tax.

did you move out less than 3 years ago? when we sold our flat you were exempt if you sold within three years (still considered primary residence).

Hi Merylstrop. No-I moved out ten years ago. Any tricks you know of to minimise tax?

You really need an accountant!

Roughly:

You will get £200k when you sell it.
You spent £25k on buying it.
You spent £10k on improvements.

So your gain so far is £165k.

You have an allowance of £10,100 for this tax year, which gives you a gain of £154,900.

Basic rate tax payers pay 18% CGT; if your gains take your taxable income above £37,400 then you pay 28% on gains above that.

So it's all rather complicated, and depends on your income, as well as whether you have used your CGT allowance on anything else. Assuming you have no other income, very roughly, you are looking at a tax bill of something in the region of £38k.

You need to get specialist advice!

the last post is totally wrong as you lived in the property - and so the time you lived in it, and the last three years of ownership are exempt from CGT, and in addition you will get lettings relief.

Could you post a time line?

brought - date
lived in - dates
rented - dates

Yes get specialist advice-you may still be able to claim it as your principal private residence because you lived there and haven't bought another property (you say you moved into a property owned by dp)? If so it will be free of CGT. You may be advised to "move back in" for a time before selling to claim this.

based on your posts

brought 23 years ago
lived in 13 years
rented 10 years

so gain = £200 - 25 - 10 = £165

PPR (principal private residence) exemption = £165k x 13/23
last 3 years exemption = £165k x 3/23

therefore potentially taxable = remaining amount ie £165k x 7/23 = £50k (approx)

You then get lettings relief, and having a quick look at this you should get £40k

therefore potentially taxable after lettings relief = £10k

Annual exemption £10k

Voila - no (or very little) tax.

this hmrc helpsheet is very useful.
You should however complete a tax return and get a proper calculation done.

you can't claim it as your principal private residence when you haven't lived in it (apart from specific circumstances) - PPR is a matter of fact - and the facts of the matter are that you have been renting it out.
You could have elected to have had it treated as your PPR, but would have had to do this between 8 and 10 years ago, it is too late now.

Moving back in at this point adds nothing, as you have previously lived in the property you get the last 3 years exemption anyway.

go and see an accountant - your outstanding mortgage is irrelevant

you will be entitled to indexation allowance - can add the cost of improvements to your original outlay -your annual capital gains allowance -
see an accountant - if you have been treating this as a rental business you
MAY be entitled to a form of 'rollover' relief if you buy another quickly - there are so many allowances that can be utilised i am sure an accountant will save you money

What fantastic advice! Thanks everyone for posting. I am much clearer now. Incidentally, I have my eye on another property which I hope to buy on a separate BTL mortgage to let out. Could my house still be considered my PPR?

oh god, indexation doesn't exist any more.
Read my post, and see an accountant.

sorry - ignore my bit about being able to elect it as your PPR - that would only be if you had 2 residences (ie two homes that you lived in), not where you live in one and rent the other out.

No, you won't be able to get PPR on the new rental property.
Although, if you could possible live in it for a period (6 months while doing it up?) then you get that period, plus the last 3 years before you sell.
You do actually have to live in it though, not just pretend to do so.

Deep breath Squirrel, count to ten...

Please can someone clarify a similar point on this. I understand the bit about pro-rating the period of actual residence and the last 36 months but what happened to the £40,00 relief you could then have on top of this? Does this no longer exist?I cannot understand page 6 of the attached helpsheet explaining this which suggests some sort of interplay between the reliefs www.hmrc.gov.uk/helpsheets/hs283.pdf. Is anyone able to clarify? Thanks.

Having recently spoken to the I.R regarding exactly the same issue as the OP I can confirm that ChasingSquirrels is absolutely right.

The bit "I think" has changed is that the gain on property is proportioned over the entre period. Therefore let's say you owned a property for 10 years and it has gone up by £200,000 (this is just figure for an example). Let's say you lived in it for 2 years and then let it for 8 years; you bought the property on the cusp of a property boom and it went up £150k the 2 years you lived in it and then only £50k during the next 8 years (when you had decided to keep the property as it was providing an income). I think (I am not sure) that you used to get valuations of property at the time that you started renting it so that in the above scenario the capital gain was a maximum of £50K (the rest of the time the property being your main residence) and then you applied relevant reliefs to it. The position now (and as I said this may be a change but it may also always have been the position) is that by holding onto the property and letting it you end up creating a much bigger capital gain to pay tax on then you would have done if you had sold at the end of your 2 year period as the way the tax is calculated takes no account of the fact that the majority of the gain was made during the time it was your main residence but prorated for the whole period of ownership. So now the potential gain is £100,000 (£200,000 times 5/10 ( i.e. owned for 10 years of which for 2 years it was your main residence plus the last 3 years of ownership being capital gain neutral (i.e. 5 years of ownership does not count)) and then apply applicable reliefs and not the lesser amount. I am not sure that anyone will be able to understand my calculations.

hi GBTW, I have probably answered your questions via our pm's but thought I would just post on here re this specific point.

I don't know whether you got a valuation at the point you started renting at some point in the past - but it certainly hasn't been the case for quite some time (we rented our house when we went overseas in 1997 and it wasn't the case then, and I have been an accountant since 1993 and have never come across it).

The situation you describe may indeed arise due to the recent variations of the property market, which would (unfortunately for the person in this situation) just be tough luck. The situation could indeed apply in reverse (no gain while you lived there but gains after you rented it out) and in that case you would "gain" from it.