Tax on selling rental house

Tate65

I'm not at all sure about the tax implications of selling a house that we used to live in but have been renting out for the last year and a bit, so hoped somebody could help.

Using simple(ish) numbers - if we lived in the house for 5 years, rented it out for 1 year then sold my understanding is that there's no tax payable on the increase in the value of the house, as you can add a couple of years on to the time you lived there as a tax-free period.

But, if we kept it for another 4 years then sold - so we'd lived there for 5 years and rented it out for 5 years - what sort of level of tax could we expect to pay? Some of the increase in value would, I believe, be taxable - so how much and at what level of tax?

JOCELYN_2

:money::j:rotfl:
There are lot of ways to ones problems and you can solve them easily one you have better suggestions ….like the ones above…keep going mate ;-)

terryw

JOCELYN wrote: »

:money::j:rotfl:
There are lot of ways to ones problems and you can solve them easily one you have better suggestions ….like the ones above…keep going mate ;-)

Uuuuhhh? or just an attempt to plug a web-dating site?
terryw

Tate65

JOCELYN wrote: »

:money::j:rotfl:
There are lot of ways to ones problems and you can solve them easily one you have better suggestions ….like the ones above…keep going mate ;-)

Er, thanks for the spam link in your post - similar to the posts you posted elsewhere too. :spam:


Does anyone have anything actually related to my question they can help me with?

SquatNow

AFAIK if you wait another 4 years you wont have to pay tax on the capital gains as there wont be any, in fact you'll make a huge loss.

terryw

OP

Last two years do not count for CGT if it was previously your designated residence. So on the details you quote CG would be based on 5 years ownership times 4/5 to allow for PPR and two years at the end on gain. Annual exemption is above £9000 so you are lucky to make a gain at all that is chargeable to CGT. sorry late at night so I can't post links but I am sure some midnight traveller will pass by shortly to do so.

terryw

Tate65

SquatNow wrote: »

AFAIK if you wait another 4 years you wont have to pay tax on the capital gains as there wont be any, in fact you'll make a huge loss.

Er, thanks for that.... I was actually asking for help on a specific tax point, not a doom laden prediction on the housing market.

You're also wrong, as prices could fall well over 50% and we'd still be in profit as it was bought some time ago - if you read the post I said I used simple(ish) numbers, so when I said we'd lived in it for 5 years it was actually a fair few more than that, but I said lived there for 5, rented out for 5 as an example.

The question isn't whether we'd make a profit on it in 5 years, but how much of that profit (that would currently be tax free) would be taxed if we sold after renting it out for 5 years.

I.e. if (again using simple numbers) we could make £100,000 profit selling the house now, which would currently be tax free, what would happen if we sold it after renting it out for 5 years? E.g. if prices were still at £100,000 (as an example - everyone knows it could well be lower but that's not the issue/point) then how much of that would be taxed and at what rate.

If the first 7 years were tax free (5 years living there, plus 2 they allow you to add on) then would 3/10 of the profit be attributed to gains while it was rented out and so taxed? And if so, at what rate?

The concern is that if that was the case and we were taxed at, say, 20% then we'd have to pay £6000 tax. If it was at 40% then it'd be £12,000 tax. All of which could be avoided if we sold now.

If prices did fall and we could only make £50,000 profit when selling after renting out for 5 years, then not only would be be 50k worse off but on the 50k we did get we could have to pay something like 3k or 6k in tax.

So I just want to get an understanding of how the tax is likely to work so I can properly think through the different scenarios and see how worthwhile it is keeping the house compared to selling it.

Yes - short term prices will drop, but trying to sell now isn't likely to be easy and some of the predicted drop will already have happened, so if prices did drop 35% I'd not actually save 35% by selling as prices are apparently already down 9% in our area in the last year.

Longer term prices will pick up, so keeping it for the long term is still an option - but working through the figures isn't easy as I don't know how the tax would work, especially as it used to be our main residence.

Tate65

terryw wrote: »

OP

Last two years do not count for CGT if it was previously your designated residence. So on the details you quote CG would be based on 5 years ownership times 4/5 to allow for PPR and two years at the end on gain. Annual exemption is above £9000 so you are lucky to make a gain at all that is chargeable to CGT. sorry late at night so I can't post links but I am sure some midnight traveller will pass by shortly to do so.

terryw

Thanks for that, Terry!

A couple of questions, though: What's PPR, and do you know what would the tax rate be?

Tate65

Actually - I've managed to find an article in the Guardian that gives an example that, while different, is similar enough to allow me to work things out.

I'd previously read up on this a couple of years ago, but there were changes to the tax system a year or so ago and I didn't know how they affected things. But this article's from 10 months ago so is hopefully still correct.

The article, for anyone interested, is here:

http://www.guardian.co.uk/money/2007/sep/19/expertsproperty.property

Basically - we'd not be eligible for CGT as there are lots of reliefs. E.g. we can add 3 years on to the number of years we lived there, then that proportion of the increase is tax free. That's private residence relief.

Then we get lettings relief, which basically means we are also exempt by the same amount as the private residence relief OR £40,000, whichever's lower - in our case it'd be the £40,000.

Then we'd also get taper relief as we'd owned it for so long. Then if there was any left over, we'd have £9,200 (currently) personal CGT relief.

So that's good to know - I don't have to worry about extra tax if we kept it.

terryw

Tate65 wrote: »

Thanks for that, Terry!

A couple of questions, though: What's PPR, and do you know what would the tax rate be?

CGT tax rate for 2008/2009 is 18 per cent on chargeable gain. exemption is £9600.

terryw

hopon

Tate65 wrote: »

Actually - I've managed to find an article in the Guardian that gives an example that, while different, is similar enough to allow me to work things out.

I'd previously read up on this a couple of years ago, but there were changes to the tax system a year or so ago and I didn't know how they affected things. But this article's from 10 months ago so is hopefully still correct.

The article, for anyone interested, is here:

http://www.guardian.co.uk/money/2007/sep/19/expertsproperty.property

Basically - we'd not be eligible for CGT as there are lots of reliefs. E.g. we can add 3 years on to the number of years we lived there, then that proportion of the increase is tax free. That's private residence relief.

Then we get lettings relief, which basically means we are also exempt by the same amount as the private residence relief OR £40,000, whichever's lower - in our case it'd be the £40,000.

Then we'd also get taper relief as we'd owned it for so long. Then if there was any left over, we'd have £9,200 (currently) personal CGT relief.

So that's good to know - I don't have to worry about extra tax if we kept it.

It isn't up to date. Taper relief was scrapped from the 6th April 08.