Mortgage free dilemma

thx4helping

Me and my husband are almost 50 years old and through work and sacrifice now own 2 properties, both of which are now mortgage free.

We're considering selling our first house, which we've had tenants in since 2009, to purchase another one of roughly equal value. 

However, we've been informed that we'll face a significant capital gains tax on the sale of the first house, potentially leaving us short on funds for the new house purchase.

Here's the background:

• We bought House 1 in 2001 for £100k and lived there until mid 2009.
• Since mid 2009, it's been rented out.
• The current valuation of House 1 is £500k.

House 2 was purchased in 2009 for £500k, and we've been living there since. Current value is around 1M mark.

The aim of this purchase of a new property for our own means/ second home.

We have around 300 k in our account and the new property is around 600k mark.

We have tried to use the Gov online calculator but can’t make head or tails and wondering if there was an another way or better option to work this out.

Help appreciated

Bigphil1474

I believe you would be liable for the Capital Gains on house 1 from 2009 until now. You can offset the sales cost and any works you have done etc. but CGT starts at around 18%. If the house has gone up from say £250k to £500k between 2009 and 2024 then that would be 18% of £250k, so around £45k. Higher earners pay more so that would need to be considered. If you only need to free up £300k from the sale of the house worth £500k, then don't see why you would be short? Even at double the CGT then you'd still clear over £400k. 

You would also have to pay SDLT (Stamp Duty) in England on the entire purchase price of the new house, which I believe is 3% - I'm sure that'll be corrected if wrong. 

BarelySentientAI

My maths - could be completely wrong of course!

Owned for 276 months.  Primary residence for 96 months, plus 9 months grace gives 105 months for PRR.

Gain £400k, relief 105/276 gives ~£250k eligible.

Guessing 24% rate, so £60k, minus the allowance of £3k - £57k to pay.

Modify the gain by things like selling/buying costs to get a more accurate number.

thx4helping

Thanks Bigphil1474 &  BarelysentientAI

So even though I’m buying a house with the money from the sale of House 1, I still have to pay CGT and then the new stamp duty? 

For some reason we thought we would be free of the gains tax as we are buying another house of the same value?

BarelySentientAI

Still taxed, because you have realised a gain.  Just buying something else with the money doesn't get any exemption.

Selling house 2 would have no CGT because it has always been your primary residence (so you get 100% PRR) - but there would still be SDLT ('Stamp Duty') buying the next one anyway.

thx4helping

Oh I hadn’t even considered that option! That would work for us as well.

Thank you