Should I sell my previous property to save TAX?

Spindrift_2

I have rented out my previous property since March 2004 (actually moved out December 2003)

Property was worth £130,000 then, but now is worth £180,000+. I have had same tenants who are keen to stay long term currently paying £500 PM including rates (NI)

I thinking about selling property (as BTL investment with tenants in situ) before the 3 year deadline to avoid paying any Capital Gains tax because I lived in it.

How do I work out what Capital Gains I would pay after 3 years (I think it's tapered down each year by 5% from 95% to 60 %?)

I presume I will always only be liable for CGT on the amount over what the property was worth when I move out i.e. £130,000 but can some confirm this assumption???

That leaves £50,000. Since house is in both my wife's and my name can I split this between a 40% tax rate (me) and a 20% tax rate?

So for me it would be £25,000 - £8,800 (annual CGT exception) = £16,200 * 40% = £6,480

And my wife £25,000 - 8,800 = 16,200 * 20% = £3,240

Total CGT after 3 years would be £6,480 + £3,240 = £9,720.

To sell this house and get another Buy To Let, will obviously incur fees including Estate Agents, Stamp duty, solicitor, finding tenants etc.

If my calculations are correct then I think I would be better to sit tight, however if CGT after 3 years is applied to the full house value (i.e. not just over £130,000) then it would be much better to sell I think?

Another question is when is my 3 years up? When I moved out or when I started to rent? I stopped paying rates just after I moved out if this makes a difference.

I have contacted Estate Agent today who will be valuing house tomorrow, and so I need to decide wether to proceed with sale or not.

Any advice gratefully received, and I promise to keep you informed of my decision and progress.

thanks
Robert

PoorDave

I might be wrong, but do you have to split the 50k equally? If your wife a 20%'er, surely better to direct more to her, if allowed?

£500pcm doesn't sound like much rent for a 180k place to me, so are you sure someone would want to buy this as a BTL? In my area you can get that much rent for a roughly 115k house.

Shouldn't the CGT liability be based on the capital gain? i.e. increase in value over the time you've owned it, rather than the complete value or the value when you moved out. Not sure on this one. Not sure it is affected by the value when you moved out - after all how would you prove this value?

silvercar

Your missing some key facts.

Firstly, if you have ever lived in the property as your principal private residence, you are exempt from CGT on the last three years of ownership.

Secondly, having lived in the property as your PPR you also get £40,000 of letting relief.

CGT is calculated on the difference between the selling price and the purchase price (and less expenses in buying and selling).

Tapering only kicks in after 3 years.

So if you own a house for 10 years and live in it for the first 3, you get exemption for the first 3 and the last 3 = 6 years. So you pay CGT on six-tenths of the gain.

without knowing when you bought the property and what you paid for it I can't do your calculation, but on the face of it I would think that letting relief will take care of most of your gain!

Ian_W

silvercar wrote:

Firstly, if you have ever lived in the property as your principal private residence, you are exempt from CGT on the last three years of ownership.
Agreed - there isn't a "3 yr deadline", the time it was your PPR and the last 3 yrs ownership are exempt - period.
Secondly, having lived in the property as your PPR you also get £40,000 of letting relief.
The same amount as PPR relief UP TO £40K I believe.
CGT is calculated on the difference between the selling price and the purchase price (and less expenses in buying and selling).
You can also discount any capital work on the property - improvements rather than maintenance.
Tapering only kicks in after 3 years.
Then is 5%pa up to a max of 50%. If owned pre 1998 indexation applies.
So if you own a house for 10 years and live in it for the first 3, you get exemption for the first 3 and the last 3 = 6 years. So you pay CGT on six-tenths of the gain.
Erm, should that be CGT on 4/10's of the gain, silvercar?
without knowing when you bought the property and what you paid for it I can't do your calculation, but on the face of it I would think that letting relief will take care of most of your gain!

There is an HMRC helpsheet about PPR and letting relief at:
https://www.hmrc.gov.uk/pdfs/2003_04/capital_gains/ir283.pdf

Also you get a CGT tax free personal allowance of £8800 each[current tax year] to set against any capital disposals. So, like silvercar I think you'll have little if anything to pay. However, CGT is complicated so do get an accountant to confirm this.

silvercar

Should be 4 tenths, not 6 tenths - thanks Ian.

Agree with all your points, except the PPR limit is unrestricted, not capped at £40k - thank goodness!

Ian_W

Hi silvercar,
Agree PPR is unlimited but Letting Relief is capped @ £40k. So to claify, letting relief is the same amount as PPR - up to a max of £40k. Your answer, which I was commenting on, could be read as LR is £40K full stop, whereas if PPR is less than that, so is LR.

At least that's my understanding. Now who said, "Tax doesn't have to be Taxing!". :rolleyes:

Spindrift_2

Thanks all. I had never heard of letting relief and it is certainly has given me some relief (no pun intended).

I purchased the house in July 1997 for £66,500 and it was PPR for both wife and I. We started letting in March 2004 until now.

Do we both get letting relief?

I need to do the sums later tonight (unless silvercar kindly volunteers)., but on the face of it I can rest easy and keep on letting the house out, which saves a lot of cost and time getting another house.

It would be nice to estimate when the break-over point is reached but no doubt lots of unknown factors here including rate of house increase. At the moment NI is a hot potato with average house prices rising £100 per day. I think the average has overtaken both Scotland and Wales according to Nationwide.

Thanks for you help and doubt I will have a few more questions when I get a change to fully digest this info and related links.

Thanks again.