Capital gains tax on rental property

maddiebelle

Can anybody help me understand capital gains tax please. We rent out a small property which we have a buy to let mortgage on and as the house was too small but couldn’t get a mortgage at the time for a larger property we moved into a rented property and are in a position now to sell the house to buy a home to live in and move out of our rented property, we have been told today that we will have to pay up to 25% capital gains tax on the property as we haven’t lived there but don’t understand it as it’s our only owned property, we only moved out as it was too small, can anybody advise who to ask or where to look to get more info please, thanks in advance

theartfullodger

Rules is rules.  Not your home. IF there was a capital gain (was there? ) then you may, subject to the various allowances etc, be liable.  And now must declare and pay within 30 days of selling.  (I did).  Hope your records are good!

Lifematters

You will only need to pay tax on any profit above your CGT allowance of £12,300. It is 18% tax on gains if you are a basic rate taxpayer or 28% if higher rate taxpayer. If you’ve lived in the property you may be entitled to private residence relief. 

You can calculate how much capital gains tax you may need to pay on https://www.tax.service.gov.uk/calculate-your-capital-gains/resident/properties/disposal-date

Tiglet2

Not an expert, but Is the house owned jointly?  If so, you will both be entitled to a tax free allowance £12,300 each tax year (as at 2020/2021).  

The amount of captial gains tax you pay will be based on the gain when you sell, i.e. the difference in the amount you bought the property for and the amount you sell for.  

For example

Property bought for £100,000
Property sold for £150,000

Capital gain £50,000
Minus £12,300 x 2 = £24,600

CGT to pay of 18% (basic rate tax payer) or 28% (higher rate tax payer) on £25,400 

[Deleted User]

maddiebelle said:

Can anybody help me understand capital gains tax please. We rent out a small property which we have a buy to let mortgage on and as the house was too small but couldn’t get a mortgage at the time for a larger property we moved into a rented property and are in a position now to sell the house to buy a home to live in and move out of our rented property, we have been told today that we will have to pay up to 25% capital gains tax on the property as we haven’t lived there but don’t understand it as it’s our only owned property, we only moved out as it was too small, can anybody advise who to ask or where to look to get more info please, thanks in advance

You can't get Private Residence Relief (PRR) for the time the property wasn't your only or main residence.  It might be the only property you own but for some of the time you owned it you resided elsewhere.

Who advised you that you would have to pay up to 25% CGT?  You will get PRR for the period the property was your only or main residence plus for the final 9 months of ownership.  Each owner also has a £12,300 CGT allowance for the 2020/21 tax year.  Once you have deducted those reliefs and allowances from the gain you will pay 18%, 28% or a combination of the two in tax.

https://www.gov.uk/capital-gains-tax/rates

AdrianC

maddiebelle said:

Can anybody help me understand capital gains tax please. We rent out a small property which we have a buy to let mortgage on and as the house was too small but couldn’t get a mortgage at the time for a larger property we moved into a rented property and are in a position now to sell the house to buy a home to live in and move out of our rented property, we have been told today that we will have to pay up to 25% capital gains tax on the property as we haven’t lived there but don’t understand it as it’s our only owned property, we only moved out as it was too small

Three key questions:
When did you buy the property?
When did you move out of it?
How much has the value grown during your ownership?

You pay CGT on the increase in value during your ownership. Not the entire value.

If you lived there for some of the time, you do not pay CGT on the proportion of the increase that corresponds with the proportion of the time you lived there, plus nine months.

So if you owned it for 200 months, and lived there for 91 months, then with the 9 month taper, you pay CGT on 100/200 = 50% of the increase in value. If the value has increased by £250,000, then you are liable for tax on £125,000.

You have an annual CGT threshold of £12,300 that you do not pay tax on, like your income tax allowance. If you are joint owners, then you each get that threshold.

The tax on gains above that threshold is 18% if you're a standard rate taxpayer, 28% if you're higher rate.

So if there is £125,000 gain between two equal-share owners, then each standard rate taxpayer is taxed on £62,500, so pays a little over £9,000 tax on the £50,000 above the threshold.

This means you are paying £18k tax on a £250k gain in value... The other £232k is straight in your pocket... Obviously, that's a lot less than 25% tax - it's effectively 7.2%.

The fact you did not own the home you lived in is irrelevant - this is a property which you owned but was not your primary residence.

This should have formed part of your decision to let the property rather than sell it when it no longer suited your needs as a home.