Letting out principal home, CGT advice needed.

Francis63

So if the tax is £28,500 more than it would've been had the London home remained my main residence the whole time (i.e. no CGT at all), then I need to deduct that from any profit made letting the property.

At £5,706 per year (if thinking of 5 years letting), it is indeed close to the mark as to whether I'd find it worthwhile, taking into account the inconvenience of living in a lesser property in a further out area, and the hassle of letting in the first place.

Unless there's any way I can continue to have my London home as my main home whilst letting it. Does that happen when people move abroad and let their main (only?) home?

Or do you have to be living in it to qualify for the main residence exemption?

What are the exact criteria for a main home remaining your principal residence for tax purposes?

LeoTLion

I re-read your post with the figures, I had missed the fact you were planning to rent out for 3 years then move back in for 2, if this were the case, I believe the exemption would be 92%, so less CGT for you to pay, which is nice.

Francis63

Maybe I can do short lets/holiday lets where the council tax remains in my name? Instead of longer term ASTs where tennants need to go on electoral roll.

booksurr

LeoTLion wrote: »

Ok, I'm not an expert on CGT, or an accountant but given the figures you quote this is what I believe the answer to be, I am happy to be corrected by anyone who is either of the above!


House value now 600k + 5 years at 50k per year = 850k


Length of time property as main residence = 15 years (180 months) + 18 months (relief) = 198 months


Length of time property owned = 20 years (240 months)


Exemption from CGT (Time Lived in/Time Owned) = 198/240 = 82%


82% of 850k = 697k leaving a difference of 153k


Less Letting Relief (40k) + Annual Allowance (11.1k) = 51.1k = 101.9k


28% (CGT) of 101.9K = £28532 to pay at sale.


I believe you can also deduct buying/selling costs (EA, SDLT and Solicitor) which would reduce liability further. Also, if you have carried out any capital improvements (loft conversion, extension etc) you can deduct the cost of those.


As stated earlier, I am not an accountant, so please do not take this as gospel and as a previous poster has said, for such a transaction it would definitely be worth talking to an accountant!

you have not deducted the original purchase cost of 200k

the gross gain is therefore 650 not 850
PRR is therefore 536,250
LR and PA remain 40 & 11.1

the net taxable gain is thus 62,650 and tax at 28% would be £17,542

LeoTLion

My intention was just to give you an indication of how much tax you'd be expected to pay, not to give you advice on how to avoid paying it, however good a catch you'd be at 80

Francis63

LeoTLion wrote: »

I re-read your post with the figures, I had missed the fact you were planning to rent out for 3 years then move back in for 2, if this were the case, I believe the exemption would be 92%, so less CGT for you to pay, which is nice.

Aha!! That has made my fog clear a little, thank you Leo!

92% exemption of £850k = £782k leaving a difference of £16,900 being the tax to pay in that case. This would work out at a difference of £5,633 for each of the 3 years that it was not considered the main home for tax purposes, not that much different to the 5 year calculation.

So there may be an optimium length of time you can let for, before selling, considering the allowances. Maybe 2 years. I need one of those sliding calculator things!

LeoTLion

booksurr wrote: »

you have not deducted the original purchase cost of 200k

the gross gain is therefore 650 not 850
PRR is therefore 536,250
LR and PA remain 40 & 11.1

the net taxable gain is thus 62,650 and tax at 28% would be £17,542

Schoolboy Error!

booksurr

Francis63 wrote: »

Thanks Leo!

So that's how it's worked out, in months?

I still don't understand the bit in red. It seems you have worked out as if I'd let for 5 years out of the 20 (not 3 years) but ok, let's go with that.

So, as far as the bit in red goes wouldn't I get the 11.1k (personal annual CGT allowance) x5 for the five years (55.5k total) but I don't see 55.5 in your calculation. So is it the case that I only get the 11.1k annual personal allowance on the year that I sell, not for each of the years that I rented and earned the money and used up no other CGT allowance. Is it not spread out?

as i said earlier the PA is NOT an annual allowance, you get it once and once only in the year of sale

the bit in red is a short cut because we know you are capped at 40k
Letting relief in long hand is the LOWER of the private residence relief (£536,250) OR the gain during the let period (excluding the final 18 months of ownership) 650 x (240-198)/240 = 113,750 OR the maximum amount allowed: £40,000. In your case therefore it is capped at 40k

try to understand that CGT calculation has 3 components
1. the % of time you used it as your main residence (including the final 18 months if not physically in residence at that time - called the "deemed occupancy period")
2. the % of time it was let out
3. the personal allowance

in respect of London property where the £ gain is usually large it is common (as in your case) to hit the letting relief cap, therefore the longer you let it out the more CGT you will pay as you are not getting anymore relief against it. Conversely the longer you live there the more main residence relief you will get and the less CGT you will pay

Francis63

LeoTLion wrote: »

My intention was just to give you an indication of how much tax you'd be expected to pay, not to give you advice on how to avoid paying it, however good a catch you'd be at 80

Thank you Leo, it is much appreciated. I also completely forgot the purchase price needs to come off, (thank you Bookspurr!). I'm not a tax avoider, but I did wonder if it would cost me more than it made in the long run, so of course it would not be worthwhile letting then.

My case is unusual I know, as most people that let their house live in a bigger and better one than the one they let, as makes sense. So they would want their own home as their main home for CGT puproses anyway.

My intentions are good, considering why I need the income from a let. It seems it may well be worthwhile after all, but only for a couple of years. it takes some working out, eh?!

Francis63

booksurr wrote: »

you have not deducted the original purchase cost of 200k

the gross gain is therefore 650 not 850
PRR is therefore 536,250
LR and PA remain 40 & 11.1

the net taxable gain is thus 62,650 and tax at 28% would be £17,542

Thank you! Even better! I have learned a lot tonight, thanks to you and Leo. I'm very grateful. :T