Possible CGT? Two Properties...(temporarily!) Possibility of house share/rent

RaveDog

Hi Folks,

I bought a small house eight years ago, and am still living in it now - (small mortgage left on the property). It has served its purpose well, as I lived on my own for six of those years. Two years ago, my partner moved in, and we have since had a baby. There is absolutely no room here now, and my partner has recently purchased a larger family home of his own for all of us to live in - (his name was never on this mortgage). I have been trying to sell my little house, but with no joy, so was thinking of renting it out to cover the mortgage.

However, I have been reading about capital gains tax (confusing!), and the implications of renting out. From what I have read, it looks like there is a possibility I will be clobbered for CGT if I do this....?

My other option would be to rent out my spare room to a lodger. If this is the case, is there a minimum number of nights I will need to spend in this property?

The mortgages for both properties can be covered for the next six months without exploring these avenues, but ideally I wouldn't want to leave my house unoccupied. Also, if my main residence was the new house, then would I need to change my mortgage with my lender?

I keep reducing the asking price of my house, but not had any joy on selling just yet (and I'm sure house prices won't recover next year, so could be stuck with this property for a while yet...)

Any advice would be great.

Cheers

Fire_Fox

If you want to let your house you will need consent to let from the lender, do you have this? IIRC you can rent for three years without incurring CGT but someone else will confirm or deny. If you want to take in a lodger then your current house must be your main residence, so you would need to be named on the council tax, have your post go there, keep most of your belongings there, to my mind your baby should be there! Staying over a couple of nights a week could be seen as defrauding the taxman and possibly voiding your home insurance, not a good move.

Why don't you post up your Rightmove link and we can comment on how attractive the listing and photos are? If not, and you are still all three living there, then perhaps the problem is that you need to have a major declutter, possibly spring clean and catch up on DIY jobs? If the house looks like you have grown out of it then your buyer will think they are going to grow out of it! If your house looks calm and neutral, then the buyer is more able to imagine their own belongings in the house. Also look at land registry sold prices for similar properties, in case you are still overpriced for it's current condition.

00ec25

CGT
you have 36 months from the date you move out of your existing house to sell it and not pay any CGT. This rule means that whatever you do with a house (in which you have previously lived as your main home) during the last 3 years you own it (eg it's empty as you now live elsewhere or it's rented out) then this period is automatically 100% exempt from CGT

it is not clear from your post whether you will actually have a share of ownership of the new place as you say your partner has bought a family home? Are you joint owners, tenants in common or is it 100% in his name. If all in his name you do not and will not own 2 properties so CGT is irrelevant

Lodger or Tenant - Income tax
As Firefox says you cannot claim the rent a room scheme (ie lodger) tax allowance unless it is your main residence, it cannot be a main residence if you live elsewhere as a family, irrespective of whether you share the ownership of that other property you live in. There is no such thing as a minimum number of days you have to sleep there,either it is your home in which you live or it is not.
If you let the property out you will have a tenant and have to pay income tax on the PROFIT you make - ie after you have claimed costs such as the mortgage. You may therefore have little or no tax to pay.

CGT on a rented out (let) property
The fact it is rented out means you will incur CGT. For example this is calculated (simplistically) as follows:
say owned for 11 years
lived in for 8 years: therefore exempt CGT as main residence
rented out for 3 years then sold: potentially liable for CGT
Tax payable: NO CGT to pay: 8 years exempt plus last 3 years of ownership = 11 years so 100% exempt from CGT

CGT is assessed against the amount of time you rent it out compared to the amount of time you owned it , so the longer you lived in it the smaller is the liable period. Also because you lived in it you are allowed (up to) an extra £40,000 of “Lettings relief” free of tax - plus you can also claim (current rate for 09/10) £10,100 personal allowance in the year you sell it
so you would have to rent it out for a long time or have a very large gain before you will end up actually paying any CGT
example
gain £330,000 (the difference between what you paid to buy it and what you sell it for – the value at the date you rented it out is irrelevant)
owned for 13 years
lived in 8 years rented out 5 years, then sold
exempt period 8 + 3 = 11 years
principal residence relief £330,000 x 11/13 = 279,230
lettings relief = £40,000
annual exemption = £10,100
net gain liable for tax £330,000 – £279,230 – £40,000 - £10,100 = £670
tax payable £670 x 18% = £120

so having lived in it for 8 years you would have to rent it out for more than another 5 years and/or have a gain larger than £330,000 before you pay more than the low hundred £ in tax. If you trouser £330,000 in cash why worry about a few hundred in tax.

RaveDog

Hi Both,

Thank you so much for your responses - it has made things a lot clearer for me in deciding what I'm going to do. (Try and sell in the first instance, then go down the rental route)

Much appreciated,
Rave