Capital Gains Tax - confused

[Slightlyjaded]

Hello

Have been on HMRC website and tried looking at previous posts but still not completely clear - hope someone can help.

I will round up numbers for ease.

I bought a flat in 1991 for £90K (mortgage of around £70K). My name only.
In 2004 it was worth about £350K and I remortgaged a further £100 to contribute to buying a house with DH which was bought in his name only.
Also in 2004, I started letting the flat.
Last year the value was around £650K and I released £100K for home improvements to our (DH name) house.
Now - in 2018 it is still worth around £650K and my mortgage is around £200 which means that I am looking at a sale profit of around £450K
However if I looked at the profit based on the original purchase price, it would be much higher - £550K

Taking the 18 month rule into account, the flat has been rented for around 50% of the time I've owned it so I owe CGT on approx 50% of the profit. I deduct the £40K allowance as it was my only home for a while which leaves my 'gain' amount which would be taxed at 40%

But is my profit £450 or £550?

I think it's £550 as I have 'cashed in' some of my profit earlier by remortgaging, but DH thinks £450 K

Which is correct? Does the re-mortgaging have any bearing?

And also, is there any allowance for home improvements to the flat? I have probably spent around £40K over the years.

Thank you!

The mortgage/remortgaging is irrelevant, you need to look at what you paid for it and what you sold it for.

You can deduct costs of improving the property when calculating capital gain but they must be for improvements, not for repairs/renewal of the existing property. So eg repainting/roof repairs would not be allowable but an extension would be...can be a grey area you might need advice on.

If you think about it, if the mortgage thing was allowable it could be abused massively - no one would have to ever realise significant capital gains, just keep remortgaging to the max to get hold of the cash and then selling properties afterwards!

Don't forget to offset your allowance of £11,700 too when calculating what you owe.

The gain is the sales price, less selling costs, less the cost of improvements (for example an extension but not maintenance and repairs.) This cost is then compared to the purchase price.

As you say, you are entitled to relief for the last 18 months and the time for which this was your principal private residence.

I believe you are also entitled to Letting Relief..

www.gov.uk/tax-sell-home/let-out-part-of-home

So: Sold for 650K purchased for 90K, profit is 560K.

You lived in it for 13 years and the last 18 months are added on so 14.5/27 is 54% Private residence relief, or 300k.

You will also be entitled to 40K of Letting Relief assuming you have been paying tax on the income and the profit on renting out was more than 40K. Leaving a chargeable gain of 260K, 11.7K of which is taxed at 0% due to your annual tax free allowance. Taxed at 28% assuming you have used your basic tax rate up with your income tax. My quick calculation (someone will be along to correct me shortly!) is that you will owe 70K.

www.gov.uk/capital-gains-tax/allowances
www.gov.uk/guidance/capital-gains-tax-rates-and-allowances#tax-free-allowances-for-capital-gains-tax

Brilliantly clear @ForgivenessIsDivine Thank you.

I am going to transit when I get home.

Does the kids tax relief in the first £11.5k still apply if you have exceeded that threshold in annual earnings that year?

I knew it had to be a simple purchase vs sale profit as nothing else makes sense. As mentioned people would otherwise be mortgaged to the hilt on all second properties. It thank you for confirming.

*transit??? Re-read

Yes, the Annual Exempt Amount (AEA) for Capital Gains Tax is in addition to the personal allowance for income tax though they are similar amounts.

Can I please jump on this post. I'm dreading being stung with a huge CGT bill
Bought flat in Dec 02 for 111, 000.
Lived in it until Sept 15. Rented it Oct 15 - April 18.
Been empty since May 18 and currently selling it for 200 000.
Can someone please put me out of my misery.....

So it was your main residence for about 80% of the time... I make it about 17k minus your personal allowance of 12kish... do 5-6k... not horrendous

Thank you @Alexalee. I had an accountant to do my tax returns but she didn't seem to be particularly knowledgeable about CGT and kept saying worse case scenario would be 20 000 which was not what I wanted to hear!

I forgot to apply the tax to the final figure so I think it would be 28% of the 6k... So should be more like 1500-2000... but I would have expected your accountant to be able to do that as a rough calculation... are you sure they didn't say 2k instead of 20k

Forgot to add lettings relief... I would be surprised if you owned any cgt tbh

Thanks again @Alexalee. Am quite sure she didn't say 2k. My partner was with me when she said it.
She's always done my tax returns for renting the property out with no problem but seemed to know zilch re CGT.

My partner and I met with her after we had done our own research on private residence relief and lettings relief.
She knew in advance we wanted to discuss CGT yet she kept saying she wasn't an expert and worse case would be 20k. She didn't seem to know too much about private and letting relief. It was us who brought it up. Like you, I would have expected her to be able to do a quick calculation but alas not. We have now moved away from the area so will no longer be using her.

@unicorns..

Total gains 89,000
Don't forget to deduct selling costs from sales price.

Main residence for 13 years (you would have to do this in months, I have rounded up) and last 18 months are discounted. .

So 14.5 out of 16 years are exempt from CGT. £80,000 approx.

You will also be entitled to letting relief if you have declared taxable profit on this rent, the lower of 40,000, the income you declared and the relief given under Principle Private Residence Relief.

However in this case, the remaining gain will be covered by your Annual Exempt Amount of £11,700.

You will have no CGT to pay.

Thanks @Forgiveness. My partner and I reckoned CGT would be next to nothing but my bloody accountant had us fearing the worst!

Change accountant! Is she actually qualified as an accountant? Mine had no difficulty calculating cgt! HMRC are just about to get it!