Would I be liable for CGT?

saajan_12

akorn77 said:

saajan_12 said:

akorn77 said:

I bought my house in June 2018 and have lived in it since purchase. It is my only property and I do not intend on buying a 2nd property.

Next year I'm planning to rent out a flat in central london to be closer to work and subsequently rent out my current house. Lets say I do this for 4 years and then sell my house in 2026. Would I be liable for any CGT? 

I've read the Private Residence Relief rules but cant get my head around it at all...

Possibly. Depends on whether you make any gains beyond the allowances.
Say you move out in June 2022 and sell in June 2026, then you will end up:
* owning property for 96 months
* living in the property as your main residence for 48 months, plus you get the last 9 months as PPR so total 57 months

Then calculate your gain (sale price - purchase price - costs). 
You get PPR for 57/96 = 59% of the gain. 
From the remaining 41% gain, you get an annual allowance of 12.3k currently. 
So taxable gain = 41% x gain - 12.3k 

You then pay tax at 18% / 28% depending on your income tax band. Note this should be calculated for each person that owns the property, for their portion only. 

If you provide the number of owners, purchase price, expected sale price, costs, and annual salaried income then we can help further. 

ETA: Don't say 'accidental landlord', its almost a swear word here. 

Thank you for your super informative post. Regarding the detailed information: 1 owner (me only), purchased for £390k, sale price £475k, i dont know what you mean by costs, and income changes yearly but id say £90k average. 

I'm trying to figure out if its better to sell my house and buy another property in central london and stump up £30k stamp duty, or rent out my house and rent a flat centrally for a few years. If I'm liable for any CGT, seems like it might be better for me to pay the stamp duty and be done with it. 

Edit - using the calculations you provided, it seems my taxable gain will be circa £20,000! 

By costs I mean to buy / sell the property eg solicitors, agents, and major capital improvements etc - not mortgage, costs during the ownership, maintenance etc. Say thats 5k. 
Gain = 475k - 390k - 5k costs = 80k

PPR for 48 months you lived there + final 9 months makes 57, of a total 96 months ownership
After PPR, you have (100% - 57/96 ) x 80k = 40.6% x 80k = £32.5k
After annual allowances, you have 32.5k - 12.3k = £20.2k taxable gain

At 90k income you're well into higher rate CGT @ 28% -> 20.2k x 28% = £5.7k tax to pay

Note this is all based on current rules + rates etc, which may well change. 

Re buying in central, depends on how long term the move is - generally under 3-4 years wouldn't be worth the conveyancing hassle / stamp duty cost, etc. On the other hand, getting tenants is another job in itself, and if you want to return, it may take some time to evict. However there are other options eg sell, invest in a stock portfolio (cheaper gains tax) and rent in central. 

GDB2222

The interesting point is that the £5.7k tax is payable based on the gain to date, which has been a period of time when it has been your private residence. Simply by renting it out for a while you create a CGT charge on a gain which would be tax free if you sold it now.

saajan_12

GDB2222 said:

The interesting point is that the £5.7k tax is payable based on the gain to date, which has been a period of time when it has been your private residence. Simply by renting it out for a while you create a CGT charge on a gain which would be tax free if you sold it now.

Well only if the OP made all that gain while living there and then the value flat lined while rented, which is a fairly contrived example. I assume OP provided the expected sale price in 4 years time (however finger in the air that is) not the current value. 

The point of the PPR is to effectively only charge for the gain during the time you don't live there. The assumption in that calc is that the gain is made linearly throughout the period of ownership. This isn't inherently unreasonable in the general case, and if you try to improve it, you suddenly create a lot of cost in extra valuations, subjectivity and open to fraud if people argue for different valuations at different times. Most houses are bought / sold on the open market, so the actual sale / purchase price are easy ways to identify the actual value.