Letting out principal home, CGT advice needed.

Francis63

I am hoping to let out my main home (after 15 years living here) and move to a much cheaper flat, outside of London, that I bought at auction. I'm doing this to provide me with an income so I can give up my job at some point and become a foster carer.

The problem is my main home is in an expensive area and (according to zoopla) increased in value by almost 50k last year. If I let it out, presumably the tennants will want to be on the electoral roll and I assume as I pay council tax on my cheap flat, that the flat would have to be classed as my main home, making me liable for CGT on the house when I come to sell.

I am a basic rate tax payer, but the income from the let, about £1,500pm (less after tax on that), added to my 19k salary, could just about make me a higher rate tax payer meaning paying CGT of 28% of the increase, so for last year 28% of 50k would have been a tax bill of £14,000.

This would wipe out most of the income from the let, making it not worthwhile.

Is there any way round this? I'd be very grateful if anyone has any info.

chris_m

You don't appear to have factored in your CGT personal allowance, £11.1K in the current financial year.
Also, how long are you considering letting it for? Just because the value's gone up by £50K last year doesn't mean that it will do so every year, so a longer letting period would possibly help to "spread" the eventual bill.

booksurr

never enter into financial planning based on (misunderstanding) the impact of tax.

decide what you want, not what tax you don't want to pay
1. you want an extra income for now & into retirement
2. you have a job which means you can live in the flat and still get to work without it affecting your lifestyle
3. you can retain the current house and therefore use it as savings towards retirement (assuming house prices continue to rise of course!)

given tax is not set at 100% all of the above are much more important than how much tax you will pay. Do not let the tax tail wag the dog.

re CGT you will get full exemption for the 15 years you lived there (plus the final 1.5 years of ownership). You will also get (up to) £40,000 of letting relief and your personal allowance (currently £11,100)

put some numbers to it and you will see how irrational your post is:

say you bought the house 15 years ago for 100k and you sell it in 10 years time for 600k. So after 25 years of ownership you have a capital "gain" of 500k (less buying and selling costs which I have ignored for simplicity)

your exemption will be 500 x (16.5/25) = 330
your net taxable gain will be 500 - 330 - 40 - 11.1 = 118,900
even at the worst case your tax payable out of the 600,000 you get in cash when you sell would be (118.9 x28%) 33,292 therefore leaving you with easily half a million pounds after tax

clearly you do not understand how the 18/28% rule works. the threshold for 28% is when your salary + the gain = >£41,865. You only pay 28% on the amount in excess of 41,865 and you pay 18% on the difference between your salary and 41,865. Anyone selling a London property is therefore almost certain to pay most of their CGT at 28% and only a tiny fraction at 18%

Francis63 wrote: »

the income from the let, about £1,500pm (less after tax on that), added to my 19k salary, could just about make me a higher rate tax payer meaning paying CGT of 28% of the increase, so for last year 28% of 50k would have been a tax bill of £14,000.

This would wipe out most of the income from the let, making it not worthwhile..

tail wags dog again. As above that is not how it actually works as you have ignored exemptions, relief and allowance,even so your argument is still wrong anyway...

1 year rent = £18,000 . Assuming all that is profit (it isn't because you have not deducted any costs) you will be left with 14,400 after income tax

if you sold at the end of 1 years renting you say the property will have risen in value by 50k. even if you paid the full 28% CGT (which as explained above you will not because this is just totally wrong way of showing it) you would be left with 36,000 after tax

if you had not rented it out and had sold immediately you would be 14,400 + 36,000 = 50,400 worse off.

80% retained income plus 72% retained capital is a lot of money. Nothing has been wiped out at all. If you cannot understand these relatively simple financial planning issues then perhaps you need to pay a professional for advice ?

silvercar

If you never sell it, you never have to pay CGT.

chris_m

booksurr wrote: »

You will also get (up to) £40,000 of letting relief and your personal allowance (currently £11,600)

Where do you get £11,600 from? The HMRC website says £11,100.

Francis63

chris_m wrote: »

You don't appear to have factored in your CGT personal allowance, £11.1K in the current financial year.
Also, how long are you considering letting it for? Just because the value's gone up by £50K last year doesn't mean that it will do so every year, so a longer letting period would possibly help to "spread" the eventual bill.

Thanks Chris, you're right. I hadn't factored in the 11.1k allowance. So using last year as an example, (next year I agree could be double or nothing, who knows, so just going with the example for now), that brings the capital gain of 50k (minus 11.1k allowance) down to 38.9k. At 28% capital gains for that year the bill would still be £10,892 (approx £3k less than my calculation)

Is that right?

Or is it that the bill is £14k, but £11.1k relief brings the bill down to only £2.89k?

booksurr

Francis63 wrote: »

Thanks Chris, you're right. I hadn't factored in the 11.1k allowance. So using last year as an example, (next year I agree could be double or nothing, who knows, so just going with the example for now), that brings the capital gain of 50k (minus 11.1k allowance) down to 38.9k. At 28% capital gains for that year the bill would still be £10,892 (approx £3k less than my calculation)

Is that right?

Or is it that the bill is £14k, but £11.1k relief brings the bill down to only £2.89k?

no that is not right. the gain is not taken in isolation across a single year. the gain is the difference between original cost and final selling price less private residence relief, letting relief and personal allowance

read my post and gives us some numbers so we can show you your real situation

Francis63

Hi Booksurr. I didn't know about the (up to?) £40,000 lettings relief. It looks to me from your calculation that this is annual, as per the 11.1k allowance?

Working this out on an 1 year basis, I just have to know if I'm earning enough from a let to make it worthwhile not having the London house as my main home. A tax bill of £10,000 for the year would mean it really wasn't worth the hassle. In fact I would say anything over about £6000 would make it questionable for me.

I don't know what I'll be doing for the next 1o years, selling, staying or letting, no idea.

booksurr

chris_m wrote: »

Where do you get £11,600 from? The HMRC website says £11,100.

typo

you also have ignored the impact of private residence relief and letting relief. there is more to CGt than just the personal allowance.

booksurr

Francis63 wrote: »

Hi Booksurr. I didn't know about the (up to?) £40,000 lettings relief. It looks to me from your calculation that this is annual, as per the 11.1k allowance?

Working this out on an 1 year basis, I just have to know if I'm earning enough from a let to make it worthwhile not having the London house as my main home. A tax bill of £10,000 for the year would mean it really wasn't worth the hassle. In fact I would say anything over about £6000 would make it questionable for me.

I don't know what I'll be doing for the next 1o years, selling, staying or letting, no idea.

you cannot base your decision on one year that is NOT how CGT works

the letting relief is a max of 40,000 against the total gain, it is not an annual figure anymore than the personal allowance is an "annual" figure. Both are simply discrete numbers you deduct as part of your calculation. As I have said the total gain is the difference between original cost and final selling. the gain in anyone year is irrelevant and if base your decision on that you will get it wrong.

read the example I have given above! if you let for one year and the value goes up by 50k you will be thousands of £ better off after tax than if you did not let the property and simply sold up either at the start or end of the year

chris_m

booksurr wrote: »

Originally Posted by chris_m
Where do you get £11,600 from? The HMRC website says £11,100.

typo

Rats, I was hoping it wasn't and that I'd got the number wrong - for when I come to flog some shares in a few months