Can someone explain whether I would be liable for Capital Gains Tax please?

[weatherwhirl]

Hi... I want to move away from London to be nearer family. I am thinking of renting out, rather than selling, my flat - in case I want to move back to the city in the future (most likely for work).

I can't afford to buy a second property in the new location (in England) so would have to rent a home. Would I be liable for CGT when it comes to selling the London property - ie. would my rented place count as a second home for CGT purposes even though I don't own it?
Thanks in advance....

Sorry if I've worded that badly. I meant to say, would I be liable for CGT on the sale of the London property in those circumstances?

Friends have advised me to keep my London flat (and rent it out) so that I can benefit from the capital appreciation to boost my paltry pension), but I'm not sure it's worth it, TBH.

You would be liable, but only for the proportion of time you did not live there (i.e the time it was an asset not your home). So if you have owned it for 10 years, and lived there for 7, only 30% of any gain would be liable to CGT.

Thanks Hereward. I don't understand why CGT applies if you only own one property and are an accidental landlord who needs to move away (and rent), as opposed to owning two properties. Seems a bit unfair but I'm sure some people will disagree. I'd be interested to hear their reasons.

So if in theory I could afford to buy a second property (with a second mortgage), I would be no worse off in terms of CGT liability?

No you wouldn't be liable if it remains your sole owned property and you had to move for work so had a reasonable argument for not living there. We had the same situation when we moved abroad for work. When we moved home and sold our house we weren't liable for CGT. Check with an accountant though in case anything has changed!

I think the rules are different if you move abroad, in that you're not liable if overseas - but I may be wrong of course!

Sadly I don't think I'd be in a position to "have" to move for work as most work in my industry is in London. I'm just depressed here and convinced the higher pollution level is affecting my asthma.

So what you get for your main property is Principle Private Residence relief. That applies for the proportion of the time that you own the property for which you live there.

If you then rent the property out once you aren't there, you are likely to be eligible for lettings relief. This only functions up to a certain increase in value I think, but my tax knowledge is a few years out of date.

Then on top of that you certainly used to get the last 18 months of increase as a relief as well. I think it's now 9 months.

Then you have your annual CGT allowance on top of all that.

So doing an imaginary scenario:

Cost bought for £200k in June 2012.
Lived in house until Dec 2017
Rented house out til June 2019
House solve in June 2022 for £400k

We'll ignore fees for now though they reduce the gain.

So the gain is £200k.

50% of that is eligible for relief under PPR - £100k.

25% may be eligible as lettings relief. £50k. This is actually then capped at £40k which is the maximum lettings relief available.

Then the remaining 2.5 years (30 months) has a total gain of £50k or £1.67k per month - 9 months will have a gain of £15k eligible for relief.

So of a total gain of £200k, £155k is eligible for relief.

So £45k is unrelieved. You then deduct your CGT allowance of £12,300 so it's down to £33k you would need to pay tax on, at 28% and very soon after the property sale - you can't just wait til the end of the next financial year.

Obviously this is an imaginary scenario and it might not be 100% right but hopefully it gives you an idea of what the process is so you can work out the scale of the risk to you.

www.gov.uk/government/publications/private-residence-relief-hs283-self-assessment-helpsheet/hs283-private-residence-relief-2022#calculating-the-gain-where-only-partial-relief-is-due

Thanks @Augend23 - that is really helpful. I will have to sit down and work it all out when I get a chance.

I'm trying to decide whether to sell my London flat or rent it out. About a year ago a friend told me I would be "insane" to sell it because of potential capital appreciation - but that was before rampant inflation and a looming recession!

I wouldn't even make a profit on the flat by renting it out, I'd just break even. So wondering what to do really....

Bear in mind though that you won't pay tax if you don't make a gain, and if you e.g. sold your flat and put £400k in the stockmarket or whatever, you wouldn't be able to fit it all in help to buy ISAs so you would pay tax on the gains on those when you sold them as well.

I'm not a tax accountant but it's definitely worth looking at what the scale of the gain would be since you bought to now, and looking at how it would change if you kept the flat Vs how much you'd be investing if you didn't, and whether feeding it into a stocks and shares ISA over a few years would be better - or buying a new home in the area you are planning to move to.

Thanks @Augend23 - yes, I really need to look into it properly. I've had my flat 8.5 years (in a not very trendy or popular part of London) and it's gone up by about £70k, though I am expecting that to fall again given the looming downturn.

What holds me back from just selling it is the thought that it's an irrevocable decision as I would never be able to afford to get back into the London property market, and most of the jobs in my industry are in London. So at leastI would have about 9 years of CGT exemption if I did rent it out.

Thanks so much for all your detailed advice - it is very much appreciated!

Here's another link to an HMRC calculator - Clicky click

A few other points:

• you'll need to check with your mortgage company whether you're allowed to let it out. If not you'll need to move to a mortgage that you can
• You'll need to report rental income and costs on a personal tax return each year. You no longer get full tax relief for mortgage interest.
• If your rental income is more than £10,000 per annum then from April 2024 you'd need to report this income quarterly to HMRC and you'll need recognised software to do this (Info re MTD)

Only you can decide if it sounds more trouble than it's worth, but London prices do generally increase faster than property elsewhere. Having said that, the economy is pretty fucked at the moment, so your guess is as good as mine on that!

Thanks @WireSkills
I checked with my mortgage company already, and I can let my flat, subject to a charge of £200 or so, then also have to pay a charge to my freeholder too!

I don't understand the tax relief on mortgage interest bit - I am thick when it comes to maths!! Maybe I will just get an accountant to help me.

Even if I paid offf my mortgage (which won't happen for a long time) my rental income would only come to £7,400pa after I have paid service charges, estate charges, landlord insurance and the letting agent's fee for full management.

However, if I carry on paying my normal mortgage of £700 a month, I will be £85 a month down (before repair costs and void periods). So with the mortgage interest thing, does that mean even if I was £85 down every month, I would still get taxed on the £700 a month I pay on the mortgage?

If I get an interest only mortgage, I would (before repairs/voids etc) or make a profit of about £200 a month.

Doesn't seem worth the hassle does it?

It certainly wasn't financially worth it for us. We made no money letting out our house - it was simply to ensure we had a foot in the London property market.

So you have never received income tax relief on the repayment part of a mortgage (the £300 or so of the £700 which reduces the amount you owe) so you would pay tax on that £300. You used to then be able to treat the £400 or so of interest as a "business expense" so you could net it off against the rental income you received to reduce the amount you owed tax on, but there are now restrictions/limits to how you do that, though I don't have a full grasp of what they are.

Thanks @Augend23 - that makes it clear to me now.

@Puppylucky - that is also my thinking, to keep a foot in the London market. If I sell I'll never be able to afford to buy into it again. Did your plan work out as you'd hoped, and would you do it again if need be?

@Augend23

Lettings relief was scrapped a few years ago.

Hi OP, firstly ignore any references to lettings relief, it doesn’t exist anymore unless you are living with the tenant.

There is no such thing as an “accidental” landlord. You are making a conscious choice to rent out your property so you will need to bear the tax consequences of that I am afraid. If you sold now there would be no CGT.

As other people have said you will get relief (PPR relief) for the period of time you lived in the property plus the last 9 months. If you move back in before you sell it you can have up to 3 years of absence for any reason count towards your residency period. It’s about you not having to pay tax on your principal residence, your home.

As far as mortgage interest relief goes, you can take 20% of the mortgage interest as a tax deduction. This however is limited to the lower of 20% of the interest, 20% of the rental profits, 20% total income.

In this example, say you had mortgage interest of £400, total rental profits of £800, total income of £20,000. Say your total tax bill was £2,000 you could deduct £80 (£400*20%) from your tax bill.

If your rental profits were £200 however you could only deduct £40 (£200*20%) from your tax bill. The remaining £40 would be carried forward to use in a future year.

Hiya @weatherwhirl yes it did work out in the end but be aware it's a big tie. We wanted to move on to a different life but were always aware we had a property to maintain and keep tenanted which was a big responsibility at times. With London mortgages as they are it's a big financial burden to manage.

You don't need a 'reasonable argument' for why you are not living in it. They don't ask why you are not in it!

Principle private residence relief is why when you sell your own home there is no chargeable gain to pay tax on.

Principle private residence relief will exempt you for the time you lived in it. There are other times where it would be deemed residence - working elsewhere in uk would count and you can get up to 4 years deemed residence for that, then currently the last 9 months is also not exempt. And each person has an annual exempt amount for capital gains tax of £12,300 per annum.

Basically the longer you rent it out the less ppr you will get but even then there may not be much tax to pay.

@pocketvenuss - they do if you are claiming relief for a period you didn’t actually live in it. They want to know which exemption you are claiming under.

The £10,000 I mention in terms of quarterly reporting is for income, not profits. So if you charge anything more than £833 in rent per month you'd have to report it to HMRC on a monthly basis.

I would recommend using an accountant if you're unsure.

The "profit" you report on your tax return won't be the same as your cash "profit".

The mortgage payment is a mixture of capital and interest but only the interest element might be considered for a tax adjustment. How the tax relief comes on interest is a bit complicated!

• report it on a quarterly basis, not monthly. Sorry. It's been a long day!

Thanks for all these very informative posts - I'm afraid I'm too thick to fully understand them though! I will have to rely on an accountant and HMRC staff if I do rent out my flat.

If most of my work wasn't in London I wouldn't bother renting it out, I would just sell, as I have no family or close friends in London.

Good luck OP, definitely get an accountant. It’s self assessment, so HMRC can’t be relied upon unless you want lots of penalties with your tax bill!