Capital gains tax on house sale

tyllwyd

We are looking at out options if we let out our current house and moving to live elsewhere. My understanding is that we are still eligible for the main residence exemption if we sell within three years.

What I am confused about is if we decide to continue letting beyond the three years - how do we establish the initial value of the house at this point so that any capital gain could be calculated? We bought the house six years ago and added a big extension afterwards, so the initital purchase price isn't a fair reflection of the current value.

PS I am assuming that our current lender will give us permission to let on our existing residential mortgage, so we wouldn't be remortgaging at the moment.

fengirl_2

No, you don't take the value on the date you begin letting.
The gain is calculated on the difference between the original cost price (plus capital alterations such as the extension), less sale price.
The period during which you lived in the house is exempt on a straight proportion basis - so if you owned a house for 20 years and let it for 10 years, then half the gain would be exempt. Also, as you rightly say, the final 3 yeras would be exempt and this would be worked on simply by taking 3/20ths of the gain as exempt.
In addition, if you let a property which you have previously lived in, the remaining gain is subject to a main residence relief of up to £40k - so if the remaining gain after taking off the last 3 years and the time you lived there was, say £10k, then that would be covered by the £40k relief and no CGT would be due.