Capital Gains Tax Query

terdev

I have a query?

In 2003 I bought a house for £93,000. I had a £5000 deposit so my mortgage was for £88000. (House No. 1)

I lived in the house for 1.5 years.

I then bought another house with my partner. (House No. 2) I currently live in this property, my main residence. This property is jointly owned between my partner and I.
House No. 1 was rented out.

House No. 1 has increased in value to £128,000, which means I have an increase in equity of £40,000.

I have released £13,650 of equity out of House No. 1 to buy another property – House No.3

I now owe a total of £99,950 on House No. 1. But it market value is £128,000.

My question is, if I were to sell House No. 1 how much capital gains tax would I have to pay and how is it calculated.
House No.1 is held in my own name.

Also is there any way of avoiding capital gains tax.


Query No. 2

If I sold house number 2 – i.e. my main residence and then moved back into house No. 1 for a period of time and then sell house No. 1, would I have to pay capital gains tax on house No. 1.


Many thanks

cash99

The period you lived in house 1 , plus the last 3 years of ownership, plus a lettings exemption of up to £40K apply. So at present you have nil cgt liability on that house.

The gain would be calculated as selling price minus selling costs, purchase price, purchase costs and any improvement costs.

Say you have owned the house for 3.5 years in total, 1.5 years is exempt as it was your PPR, it has been let for 2 years, which is currently covered by the last 3 years of ownership exemption, and will be for another year, and if you still own the house in more than a years time lettings exemption of up to £40k can still be used.

Let's say you sell it in 2 years time.Total period of ownership would be 5.5 years. 1.5 + 3 years = 4.5 years is exempt, 4.5 / 5.5 of the total gain is exempt. 1/5.5 of the gain is taxable, but the lettings exemption can still be used. If the market value is £150k in 2 years time, ignoring the fees etc, the gain would be 150-93=57 x 1/5.5 = £10k, which is covered by the lettings exemption.

Obviously the longer you keep the property the more of the gain becomes taxable, and the lettings exemption may be exceeded, but you would also qaulify for taper relief, and you also have an annual exemption

The only period of owenership of house 1 that is subject to cgt, after the reliefs listed above, is when it was let. Moving back in does not change this fact. Any period of ownership after you move in would be exempt, but currently you are getting PPR exemption on 2 properties and will continue to do so for around a year, depending on your actual purchase date of House 1. There is no tax reason for selling house 2 and moving into house 1.

terdev

Thanks for the advice, your help is much appreciated.